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Fitch upgrades Saudi to ‘A+’ on robust fiscal buffers

The Saudi pavilion at Expo 2020 Dubai hosted more than 4.8 million visitors SPA
The Saudi pavilion at Expo 2020 Dubai hosted more than 4.8 million visitors

Fitch Ratings has upgraded Saudi Arabia’s long-term foreign-currency issuer default rating (IDR) to ‘A+’ from ‘A’, with a stable outlook.

The higher rating reflects the kingdom’s strong fiscal and external balance sheets, including solid debt-to-GDP ratio, robust sovereign net foreign assets and significant fiscal buffers in deposits and other public sector assets.

Oil dependence, weak World Bank governance indicators and vulnerability to geopolitical shocks remain relative weaknesses, although there are some indications of improvement in these factors, the ratings agency said in a report.

Oil revenue will account for around 60 percent of total budget revenue in 2023-2024, down from 90 percent a decade ago.

“We estimate that a $10 per barrel movement in oil prices would change our budget forecast by just over two percent of GDP,” Fitch said.

The report expects gradual improvements in fiscal structure, despite a deterioration in 2022 and a higher spending profile for 2023-2025. In 2022 the fiscal break-even oil price increased to $86 per barrel, while the non-oil primary deficit to non-oil GDP widened. 

Fitch forecasts the fiscal break-even oil price to fall to $76 per barrel in 2025 – higher than its previous projection below $70. The non-oil primary balance to non-oil GDP will continue to improve, narrowing to 23 percent in 2025 from 31 percent in 2022.

Last week Saudi Arabia and other Opec+ oil producers announced further oil output cuts of around 1.16 million barrels per day, pushing prices up by more than 6 percent to over $80.

Oil prices are predicted to rise higher, with $100 a barrel now looking more likely in the coming months, said Edward Bell, senior director at Emirates NBD.

Fitch anticipates real growth of five percent in the non-oil private sector this year, down from 5.4 percent in 2022, supported by higher government capex, investments by sovereign Public Investment Fund (PIF), including giga projects, robust credit growth, ongoing development of the retail and entertainment sectors and employment gains among Saudis and expatriates. 

“In 2024-2025, we forecast non-oil private sector growth to slow closer to four percent, with the dampening impact of lower forecast oil prices set against ongoing economic reforms and high public sector investment spending,” the agency noted.

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