Paris, November 05, 2021 -- Moody's Investors Service ("Moody's") has today
changed the outlook on the Government of Saudi Arabia to stable from negative
and affirmed its long-term issuer and senior unsecured ratings
at A1. Moody's also affirmed the Government of Saudi Arabia's (P)A1
senior unsecured medium-term note program ratings.
The change of outlook to stable reflects increased likelihood that,
in the next several years, the government will reverse most of the
2020 increase in its debt burden while also preserving its fiscal buffers.
This view is based on Moody's assessment of the government's
improving track record of fiscal policy effectiveness, evidenced
by policy responses in periods of both low and high oil prices,
that consistently demonstrate a commitment to fiscal consolidation and
longer-term fiscal sustainability. The expected fiscal improvement
over the next several years will be facilitated by higher oil prices,
although the stable outlook also takes into account the expectation that
oil prices will remain volatile.
The affirmation of the A1 ratings reflects Moody's view that Saudi Arabia's
structural vulnerability, due to its economic and fiscal reliance
on the hydrocarbon sector, will remain a constraint on the rating
for the foreseeable future. Over the next decades, Moody's
expects oil exports to produce less robust revenues at peak oil prices
and weaker revenues at trough oil prices compared to historical experience
because global initiatives to limit the adverse impacts of climate change
will increasingly constrain the use of hydrocarbons and accelerate the
shift to less environmentally damaging energy sources. For Saudi
Arabia, the credit impact of carbon transition is mitigated by the
sovereign's demonstrable adjustment capacity and its progress on
economic and fiscal diversification. The affirmation also takes
into account the government's moderate debt burden, lower
than most similarly rated sovereigns, availability of robust fiscal
buffers, and economic strength underpinned by its highly competitive
position in the oil market.
Today's rating action also applies to the A1 backed senior unsecured ratings
of KSA Sukuk Limited, and its (P)A1 backed senior unsecured medium-term
note program rating. KSA Sukuk Limited, a special purpose
vehicle incorporated in the Cayman Islands, is wholly owned by the
Government of Saudi Arabia and its debt issuances are, in Moody's
view, ultimately the obligation of the Government of Saudi Arabia.
Moody's has also affirmed Saudi Arabia's Aaa.sa senior
unsecured and senior unsecured MTN ratings on the national scale.
Saudi Arabia's local currency (LC) and foreign currency (FC) country ceilings
remain unchanged. The LC country ceiling at Aa2, two notches
above the sovereign issuer rating, incorporates heavy reliance on
a single revenue source for the government and non-government issuers
and geopolitical risk, partly mitigated by relatively predictable
institutions and balance of payments stability. The FC country
ceiling at Aa2, in line with the LC ceiling, reflects very
low transfer and convertibility risks, given the central bank's
very large foreign currency buffers.
RATINGS RATIONALE
RATIONALE FOR THE CHANGE OF OUTLOOK TO STABLE FROM NEGATIVE
COMMITMENT TO FISCAL DISCIPLINE WILL SUPPORT IMPROVEMENT IN DEBT METRICS
Moody's expects Saudi Arabia's fiscal deficit to narrow sharply
in 2021 to less than 2.5% of GDP from 11.2%
of GDP in 2020 and to remain close to balance in the next several years.
Consequently, the government's debt burden will decline below
29% of GDP at the end of this year and further to around 25%
of GDP by 2025 from 32.5% of GDP in 2020, reversing
most of the pandemic-related erosion of the government's
balance sheet.
Although higher oil prices will contribute significantly (about two-thirds)
to the projected fiscal improvement this year, Moody's expects
that this improvement will be sustained in the medium term because of
the government's commitment to further fiscal consolidation over
the coming years, including under the newly announced Fiscal Sustainability
Program (FSP). The FSP builds on the Fiscal Balance Program measures
and reform initiatives implemented during the past five years, which
increased non-oil revenue to more than 18% of non-oil
GDP in 2020 from less than 10% in 2015 and reduced non-interest
expenditure to 53% of non-oil GDP from 56% in 2015.
The FSP aims to further enhance fiscal discipline, improve effectiveness
of public finance management, support the rebuilding of fiscal buffers
by adopting fiscal rules and by transitioning to a multi-year budgeting
process, which will also better align the forward-looking
fiscal framework with national expenditure priorities.
The government's improving track record of fiscal policy effectiveness
increases the likelihood that the above-mentioned debt trajectory
remains broadly intact even if oil demand and prices weaken somewhat relative
to Moody's expectations. This view is supported by the government's
fiscal policy response to the oil price shock during 2020, demonstrating
overall spending restraint and its decision to triple the value-added
tax rate to 15%, despite unfavorable economic conditions,
in order to offset some of the decline in oil revenue. During 2020,
the government accommodated most of the exceptional pandemic-related
spending by cutting other lower-priority expenditures.
Moody's expects that some of the 2020 spending cuts will be permanent,
facilitating further reductions in overall spending during 2021-23
as the pandemic-related fiscal support is gradually withdrawn.
Moody's expects that overall spending will likely decline by around
6% this year, whereas the draft 2022 budget targets another
6% reduction (equivalent to around 2% of GDP) next year,
despite higher oil prices, which in the past often led to increases
in expenditure.
RATIONALE FOR AFFIRMING THE A1 RATINGS
CAPACITY TO ADJUST AND DIVERSIFICATION PROSPECTS MITIGATE STRUCTURAL VULNERABILITIES
DUE TO RELIANCE ON HYDROCARBON SECTOR
Heavy, albeit gradually declining, economic and fiscal reliance
on the hydrocarbon sector will remain an important feature of Saudi Arabia's
credit profile for many years to come, constraining the sovereign's
ratings. In Moody's near- to medium-term baseline
scenario, which assumes that oil prices average close to the upper
end of the agency's $50-70/barrel medium-term
forecast range over the next several years, the contribution of
the oil and gas sector to overall GDP will remain around 30% and
the contribution of hydrocarbon revenue to total government revenue will
remain above 50%, exposing the sovereign to declines in oil
demand and prices and, longer term, to credit risks stemming
from global carbon transition.
In the near term, higher revenues from oil exports will strengthen
the government's financial profile, providing more flexibility
to adjust to shocks and to the long-term negative credit impacts
from carbon transition. However, over the coming decades,
Saudi Arabia's adjustment capacity may be tested by a potential
acceleration in carbon transition compared to currently announced policies,
which would bring forward a decline in global oil demand and prices.
At this stage, Moody's assesses that Saudi Arabia has significant
institutional and financial capacity to adjust to carbon transition proceeding
at a moderate pace. Saudi Arabia's debt burden remaining
around 25-30% of GDP over the next few years compares to
Moody's projections of 35-40% for the median of Aa-rated
sovereigns and around 50% for A-rated peers. Fiscal
buffers, in the form of deposits with the central bank, were
around 17% of GDP in 2020, covering half of the government's
outstanding debt.
The capacity to adjust is further supported by the sovereign's high
GDP per capita and the ongoing economic diversification efforts by the
government aimed at increasing the size and the share of the private non-oil
sector in the economy. The government's giga projects supported
by large capital deployments from the Public Investment Fund, targeted
at around 4-5% of GDP per annum in the next few years,
and reforms in particular of education will support economic diversification.
Over the longer term, Moody's expect these efforts to reduce
Saudi Arabia's economic exposure to oil market fluctuations while
also generating job opportunities for the citizens, which will relieve
the government from spending increases to support public sector employment
growth in order to preserve social stability.
Saudi Arabia's adjustment capacity and resilience to the risks stemming
from carbon transition are also supported by its highly competitive position
in the oil market, reflected in one of the lowest extraction costs
globally, which will support economic resiliency even in a low oil
price environment, large spare production capacity, very large
hydrocarbon reserves, and its leadership of the Organization of
Petroleum Exporting Countries.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Saudi Arabia's highly negative exposure to environmental risks,
reflected in its E-4 issuer profile score, mainly relates
to carbon transition due to its economic and fiscal dependence on the
hydrocarbon sector, which is however partly mitigated by very low
hydrocarbon production costs. Saudi Arabia is also one of the world's
most arid states and rapid economic and population growth in recent decades
have increased challenges surrounding water sustainability. While
most of Saudi Arabia's water is produced by energy intensive desalination
plants, which are also vulnerable to attacks and oil spills,
the country has access to cheap energy that mitigates some of this risk.
Exposure to social risks is moderately negative (S-3 issuer profile
score). The main source of pressure arises from the elevated unemployment
rate, especially among the youth. Robust population dynamics
will continue to drive rapid growth in the labor force over the coming
decades creating pressure to generate job opportunities for the citizens.
The effectiveness of labor market nationalization policies in reducing
the elevated unemployment rate among citizens will remain the key policy
challenge and an important driver of social risks in the foreseeable future.
That said, a large share of expatriates in the overall labor force
partly mitigates these risks.
Saudi Arabia's relatively strong institutions and governance strength
supports its neutral to low G-2 issuer profile score. Moody's
assessment of Saudi Arabia's institutions and governance strength
reflects strong monetary and macroeconomic policy effectiveness,
improving fiscal policy effectiveness as mentioned above.
Saudi Arabia's ESG Credit Impact Score is moderately negative (CIS-3),
reflecting highly negative exposure to environmental risks and moderately
high social risks, which are partly contained by institutions and
governance strength and economic resilience, including the availability
of financial resources in the form of sovereign wealth fund assets that
can be used to absorb shocks. Its ESG attributes are overall considered
as having limited impact on the current rating, with greater potential
for future negative impact over time, especially if carbon transition
accelerates compared to currently stated policies globally.
GDP per capita (PPP basis, US$): 46,489 (2020
Actual) (also known as Per Capita Income)
Real GDP growth (% change): -4.1% (2020
Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 5.4%
(2020 Actual)
Gen. Gov. Financial Balance/GDP: -11.2%
(2020 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -3.1% (2020 Actual)
(also known as External Balance)
External debt/GDP: 34.0% (2020 Actual)
Economic resiliency: a2
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 01 November 2021, a rating committee was called to discuss the
rating of the Saudi Arabia, Government of. The main points
raised during the discussion were: The issuer's economic fundamentals,
including its economic strength, have not materially changed.
The issuer's institutions and governance strength, have not materially
changed. The issuer's fiscal or financial strength, including
its debt profile, has not materially changed. The issuer's
susceptibility to event risks has not materially changed.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade would be supported by increasing evidence that structural reforms
aimed at reducing the reliance of Saudi Arabia's economy and public
finances on oil revenues will likely be more effective than in Moody's
baseline scenario, strengthening the sovereign's economic
and fiscal resilience to shocks and positioning it more favorably to address
future carbon transition challenges. Such improvements would likely
be reflected in a declining government debt burden, independent
of oil price cycles, increasing fiscal buffers and evidence of significant
and steady progress in diversifying the economy and fiscal revenue streams.
The conclusion that the government's reform efforts will fall substantially
short of its economic and fiscal objectives, with the debt burden
continuing to rise and leaving Saudi Arabia persistently and significantly
exposed to further oil market shocks and rising social pressures,
would exert downward pressure on the ratings. A significant escalation
of regional geopolitical risks that would threaten Saudi Arabia's
oil production and export capacity would also likely lead Moody's
to downgrade the ratings. Evidence that global carbon transition
is accelerating markedly, with oil demand and prices at risk of
falling substantially faster, would also exert negative pressure
on the ratings, unless Saudi Arabia was able to adjust its economic
and revenue bases equally rapidly.
The principal methodology used in these ratings was Sovereign Ratings
Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
Moody's National Scale Credit Ratings (NSRs) are intended as relative
measures of creditworthiness among debt issues and issuers within a country,
enabling market participants to better differentiate relative risks.
NSRs differ from Moody's global scale credit ratings in that they are
not globally comparable with the full universe of Moody's rated entities,
but only with NSRs for other rated debt issues and issuers within the
same country. NSRs are designated by a ".nn"
country modifier signifying the relevant country, as in ".za"
for South Africa. For further information on Moody's approach to
national scale credit ratings, please refer to Moody's Credit rating
Methodology published in May 2016 entitled "Mapping National Scale Ratings
from Global Scale Ratings". While NSRs have no inherent absolute
meaning in terms of default risk or expected loss, a historical
probability of default consistent with a given NSR can be inferred from
the GSR to which it maps back at that particular point in time.
For information on the historical default rates associated with different
global scale rating categories over different investment horizons,
please see https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1280297.
The local market analyst for Saudi Arabia, Government of's ratings
is Alexander Perjessy, +971 (423) 795-48.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
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issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
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tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated
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Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the UK and is endorsed
by Moody's Investors Service Limited, One Canada Square,
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Lucie Villa
VP - Senior Credit Officer
Sovereign Risk Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
