The fiscal break-even oil price, which we estimate at over USD80/bbl, is higher than for many regional peers and above our forecast oil price levels. We forecast the central government deficit at 5.3% of GDP in 2018 (SAR152 billion), from 9.3% in 2017, as sharp increases in oil and non-oil revenue offset resurgent government spending. Underlying fiscal policy has become more expansionary as measured by the expected widening of the non-oil primary deficit in 2018. We expect this to be reflected in a renewed widening of the overall budget deficit to 7.5% of GDP by 2020 as oil prices moderate to our baseline assumption of an average of USD57.5/bbl (for Brent). In the recent 2019 pre-budget statement, the medium-term forecast for government spending and revenue is 8%-9% higher than in the Fiscal Balance Program (FBP) update released alongside the 2018 budget. The 2018 FBP update had pushed back the target year for fiscal balance to 2023 from 2020.
The government has taken a number of measures to diversify its revenue base and trim the fiscal deficit. This year started with the introduction of a 5% VAT, a 130% hike to petrol prices, increases to household electricity tariffs as well as an increase in levies on expatriates. These measures contributed to a 48% jump in non-oil revenue in 9M18. We expect the full-year increase in 2018 to be a more moderate 21%, after 38% in 2017.
Some of the budgetary impact of structural non-oil revenue measures is being offset by additional spending to soften their social impact and support growth. The government has introduced means-tested transfers from the new SAR32 billion Citizen’s Account (expected to increase alongside further reforms affecting the cost of living). The 2018 budget also earmarked SAR72 billion of central government spending for a private sector stimulus programme focused on infrastructure, SMEs and export financing. Another SAR50 billion stimulus package was announced shortly after the publication of the 2018 budget (to be funded by receipts from last year’s anti-corruption campaign and savings elsewhere).
There are prospects for spending to grow less than in our baseline forecast, helping to reduce the deficit further. Expenditure was 73% of the budget in the first three quarters of 2018, and 69% of the government’s updated fiscal projections. If full-year expenditure ends up being in line with the budget, the deficit could narrow to 2.7% of GDP in 2018. We estimate that an increase of oil prices by USD5/bbl over our baseline forecast would lead to a 1.7% of GDP improvement in the fiscal balance.
Amid continued deficits, we expect that the government will continue to issue domestic and international debt. Under our baseline oil price assumptions, we see the central government debt ratio rising from a little over 17% in 2017 to about 34% of GDP in 2020, by which time debt net of general government deposits could turn marginally positive. Our fiscal forecasts imply net financing needs of about SAR176 billion in 2019 and SAR219 billion in 2020. The broader public sector balance sheet will remain a rating strength, underpinned by sovereign net foreign assets of 67% of GDP in 2018 (reflecting government, central bank and pension fund foreign assets less foreign debt).
We assume no proceeds from privatisation in 2018-2020. The government’s privatisation programme unveiled in April this year targets proceeds of SAR40 billion by 2020 from selling or otherwise handing over to the private sector various government assets. The IPO of a 5% stake in Saudi Aramco has been pushed back to at least 2021.
We forecast Saudi Arabia’s current account surplus at 8.3% of GDP (USD63 billion) in 2018 after 2.2% in 2017 as a result of a bounce back of hydrocarbon receipts. However, we expect central bank reserves to increase only by a modest USD11 billion by year-end amid continued non-resident investments abroad (partly related to the Public Investment Fund). The level of central bank reserves in 2018 will remain exceptionally high at over 24 months of external payments. We expect the current account surplus to narrow by 2020, reflecting a moderation in oil receipts and a recovery in domestic demand, capital spending and imports. The financial account could have some support from a pick-up in inward FDI (USD1.7 billion in 1H18 from a low of USD1.4 billion in the whole of 2017), inward portfolio equity investment (related to Saudi Arabia’s inclusion in major equity indices) and public sector borrowing.
We expect growth to pick up to 2.2% in 2018 (from -0.9% in 2017) and stay in that range in 2019-2020. The fiscal expansion will accelerate non-oil growth to 1.8% (from 1.1% in 2017), but, in our view, it is still likely to be held back by high domestic uncertainty. Our forecasts incorporate oil GDP growth of 2.7% in 2018 (from -3.1% in 2017) related to continued growth in refining activity and a recovery in oil production. We assume that oil production will stay at its September 2018 level of 10.5 mmbbl/d and do not assume a new OPEC deal to cut output. Structural reforms under the “Vision 2030” programme could boost growth over the medium term.
In our view, political risks are high compared with peers and historical norms, due to Saudi Arabia’s prominent role in a volatile region, the country’s increasingly assertive and unpredictable foreign policy and the rapid pace of change domestically. The potential for politics to harm growth, trade and investment has been highlighted by Saudi Arabia’s recent diplomatic rows with Canada and Germany, the international reaction to the murder of Jamal Khashoggi in the Kingdom’s consulate in Istanbul and the ongoing dispute with Qatar. Meanwhile, tensions between Saudi Arabia and Iran remain high over Yemen, Iran’s nuclear programme and its influence across the region.
SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO)
Fitch’s proprietary SRM assigns Saudi Arabia a score equivalent to a rating of ‘A-‘ on the Long-Term Foreign-Currency (LT FC) IDR scale.
Fitch’s sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to rated peers, as follows:
– Public finances: +1 notch, to reflect the large government deposits held with the central bank as well as other government assets.
– External finances: +1 notch, to reflect the large size of sovereign net foreign assets, largely held as international reserves and the strong net external creditor position.
Fitch’s SRM is the agency’s proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to an LT FC IDR. Fitch’s QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.
The following factors could, individually or collectively, trigger positive rating action:
– Fiscal consolidation or an extended rise in oil prices that generate a sustainable fiscal surplus and reverse the decline in the government’s net creditor position.
The following factors could, individually or collectively, trigger negative rating action:
– Failure to reduce the budget deficit and halt the deterioration of the public sector balance sheet; and
– Spill-over from regional conflicts or a domestic political shock that threatens stability or affects key economic policies or activities.
Fitch assumes that Brent crude oil prices will average USD70/bbl in 2018, USD65/bbl in 2019 and USD57.5/bbl in 2020, in line with its Global Economic Outlook – September 2018.
The full list of rating actions is as follows:
Long-Term Foreign-Currency IDR: affirmed at ‘A+’; Outlook Stable
Long-Term Local-Currency IDR: affirmed at ‘A+’; Outlook Stable
Short-Term Foreign-Currency IDR: affirmed at ‘F1+’
Short-Term Local-Currency IDR: affirmed at ‘F1+’
Country Ceiling: affirmed at ‘AA’
Issue ratings on long-term senior unsecured foreign-currency bonds: affirmed at ‘A+’
Issue ratings on KSA Sukuk Limited global trust certificates (sukuk): affirmed at ‘A+’
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Additional information is available on
Country Ceilings Criteria (pub. 19 Jul 2018)
Sovereign Rating Criteria (pub. 19 Jul 2018)
Sukuk Rating Criteria (pub. 25 Jul 2018)
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