Saudi ratings upgraded on continued economic reforms

Neom

Ratings agency Moody’s has upgraded Saudi Arabia’s credit rating on the back of the kingdom’s continued progress in economic diversification, which is likely to be sustained.

The Gulf state’s long-term local and foreign currency issuer and senior unsecured ratings were upgraded to “Aa3” from “A1”. In addition, the local and foreign currency medium-term note programme ratings were revised upwards to (P)Aa3 from (P)A1.

“Continued progress will, over time, further reduce Saudi Arabia’s exposure to oil market developments and long-term carbon transition,” it said.

The recent fiscal space recalibration and reprioritisation of diversification projects provides a conducive environment for sustainable development of the non-hydrocarbon economy while maintaining a strong balance sheet.

However, the outlook was changed to “stable” from “positive”, indicating balanced risks to the rating at a higher level.

The agency said that progress in the large diversification projects may crowd in the private sector and spur the development of non-hydrocarbon sectors at a faster pace than expected. But, global growth and broader oil market developments are not conducive to high levels of public spending.

“A large decline in oil prices or production could intensify the trade-off between progress in economic diversification and fiscal prudence, potentially leading to a weaker sovereign balance sheet."

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Moody's estimates that spending by the government and the Public Investment Fund (PIF) will continue to exceed 20 percent of non-hydrocarbon GDP – the highest in the Gulf Cooperation Council (GCC) region.

Additionally, private consumption is expected to remain strong, driven by the commercial phases of giga-projects and other large-scale initiatives, particularly in hospitality, entertainment, retail, and restaurants.

The progress in employment and participation of women in the workforce will support demand for the added capacity in such services, spurred by social reforms that began in 2016 and unlocked the sector's potential, the agency said.