Moody's Investors Service has affirmed the Saudi government's long-term issuer and senior unsecured ratings at A1 with a stable outlook.

 

The affirmation of Saudi Arabia's A1 ratings is supported by the following key rating factors:

 

*Moody's baseline view that the fiscal consolidation expected at the time of the last rating action will continue over the medium term, ensuring stabilization of the government's debt burden below 30 per cent of GDP.

 

*Moody's continuing expectation that the government's ambitious structural reform agenda will, over time, reduce the exposure of Saudi Arabia's economy and public sector balance sheet to oil prices, balanced 

against the associated execution risks given the large scale of the task at hand and the potentially negative short-term economic and social impact of some of the related measures.

 

Moody's said the stable outlook indicates that the risks to the ratings are broadly balanced. The government's reform program, including the plans to balance the fiscal budget by 2023, could over time offer a route back to a higher rating level. 

 

However, social pressures could in the next few years slow or reverse the reform progress in a way that would lead to erosion of Saudi Arabia's fiscal strength beyond current expectations.

 

In a related action, Moody's also affirmed the Government of Saudi Arabia's senior unsecured MTN rating at (P) A1. The top ratings agency has also affirmed the A1 senior unsecured rating and the (P)A1 senior unsecured MTN rating of KSA Sukuk Limited, a special purpose vehicle incorporated in the Cayman Islands, whose debt is in our view ultimately the obligation of the Government of Saudi Arabia.

 

According to Moody's Saudi Arabia's long-term foreign-currency bond and bank deposit ceilings remain unchanged at A1, and the short-term deposit ceilings remain unchanged at Prime-1. 

 

The kingdom's long-term local-currency country risk ceilings remain unchanged at A1, it added.

 

The top ratings agency said lower oil prices since 2014 have led to a significant deterioration in Saudi Arabia's fiscal position with the budget deficit rising from 2.3 per cent of GDP in 2014 to almost 13 per cent in 2016 (17 per cent if the settlement of government payment arrears from previous years is included) and the government debt rising from 1.6 per cent of GDP in 2014 to 13.1 per cent in 2016 and just over 17 per cent by end-2017. 

 

In response, the government has implemented a number of measures to contain the fiscal deterioration. 

 

These included deep cuts in capital expenditures (-64 per cent between 2014 and 2016) through project 

cancellations and reprioritization and similarly large reductions in government spending on goods and services (-44% between 2014 and 2016) through a spending rationalization exercise, it added.

 

Moody's estimate of the fiscal break-even oil price has declined from $95/bbl in 2015 to around $84/bbl in 2017, indicating that part of the reduction in the budget deficit to around 9 per cent of GDP in 2017 was due to expenditure cuts and newly introduced non-oil revenue measures. 

 

Due to better than expected overall fiscal performance and the government's use of its sizeable financial assets to finance a portion of its borrowing requirement, the government debt burden rose to 17.3 per cent of GDP at end-2017 compared to Moody's original expectation of close to 28 per cent of GDP.

 

Against this increased fiscal headroom, it is Moody's view that the modification of the FBP announced in January 2018 to delay the achievement of a balanced budget to 2023 instead of 2020 makes the fiscal reform momentum more sustainable, the fiscal targets more realistic, and the overall fiscal consolidation and diversification program more credible. 

 

The stable outlook indicates that the risks to the ratings are broadly balanced, said the Moody's in its report. 

 

Upward pressure on the rating would come from the combination of diminishing exposure to 

fluctuations in oil prices as reflected in lower fiscal and external breakeven oil prices, a rebuilding of the government's net financial assets towards the levels before 2014, and a durable strengthening of the 

growth outlook for the non-oil private sector, it cautioned.

 

By the same token, failure to achieve the government's broad objectives, with high economic and fiscal reliance on oil remaining a key feature of Saudi Arabia's credit profile, would cause downward pressures to intensify and would probably result in the rating being lowered over time, it added.