S&P Global Ratings has affirmed its 'A-/A-2' unsolicited long-and short-term foreign and local currency sovereign credit ratings on Saudi Arabia with a stable outlook.

The kingdom will experience modest economic growth from 2018, supported by rising government investment and, later in our forecast period, a gradual increase in oil production, said the top ratings agency in its report.

The stable outlook is based on our expectation that economic growth will accelerate moderately in 2018, supported by rising government investment, it stated.

At the same time, S&P said it expects that the Saudi authorities will continue to take steps to consolidate public finances over the next two years, while maintaining the kingdom's formidable stocks of liquid external assets.

The ratings agency warned that the ratings could be lowered if it observed a reversal in the trend of fiscal consolidation, or a sharp deterioration of the sovereign's external position.
 
An unexpected materialisation of contingent liabilities or a build-up of arrears could also place additional pressure on expenditures, it stated.

The ratings could also come under pressure if there was a significant increase in domestic or regional political instability, which would have fiscal consequences," it added.

S&P said on the other hand it could raise the ratings if Saudi Arabia's economic growth prospects
improved markedly beyond the rating agency's current assumptions.

"The ratings on Saudi Arabia are supported by its strong external and fiscal stock positions, which we expect it will maintain despite large central government deficits. The ratings are constrained by limited public-sector transparency and limited monetary policy flexibility," stated the ratings agency in its report.

While decision-making structures are centralized and, in our view, relatively opaque, we do not expect any major deviation from the stated domestic policy course of fiscal consolidation, economic diversification, and gradual socioeconomic liberalization.

We understand that authorities are concerned by the notable decline in net direct investment inflows since 2013. In this regard, we also understand that authorities are focused on creating incentives
for foreign investment in Saudi's noncommodity sector.

An era of change in Saudi Arabia

S&P pointed out that Saudi Arabia had articulated an ambitious strategy to reduce the economy's dependency on oil and on imported labor, to transform the domestic education and job market, and to consolidate the budget.

Increasingly centralized decision-making could lead to more uncertain policy implementation, but the ratings agency said it did not expect any major deviation from the stated policy course.

Saudi Arabia will partly fund its ambitious economic reform program using the large fiscal and external
buffers that it amassed during the pre-2015 era of twin balance of payments and budgetary surpluses, it stated.

The government is implementing a series of reforms that include social measures that aim to increase labor participation (particularly female), to improve educational attainment, and to raise the
private sector's role in the economy, while achieving a balanced budget by 2023 (previously 2020).

"While the country's decision-making process remains highly centralized, we do not expect any major deviation from the goal to broaden the economy beyond its traditional reliance on hydrocarbons," said S&P in its report.

The authorities have decided to push back the target to balance the general government budget from 2020 to 2023. This reflects the decision to increase public investment under a four-year stimulus plan aimed at stabilising private-sector demand, even as the government moves on other fiscal consolidation measures, such as energy tariff hikes, it stated.

Overall, we think there are grounds to project a gradual economic recovery, following last year's
contraction. Nevertheless, given that oil production makes up a significant portion of Saudi GDP, forecasting growth in Saudi Arabia continues to be highly sensitive to assumptions of Opec production targets, not least because Saudi Arabia maintains the world's largest installed crude oil production capacity at around 12 million barrels per day, and is the key marginal producer.
 
"Our GDP per capita estimate is just shy of $22,000 in 2018, and we expect that, on a trend basis, growth will remain somewhat below peers," stated the S&P.

"Despite the country's rising fiscal expenditures, we expect continued consolidation as oil prices increase in 2018 and as other revenue-raising items come online. We forecast a continued current account surplus, but surpluses are likely to moderate in line with our oil price assumptions," it added.-TradeArabia News Service