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S&P Global affirmed the Kingdom’s long- and short-term foreign and local currency sovereign credit ratings at A/A-1 and revised its outlook to positive from stable, according to a statement.
The rationale: The revised outlook comes on the back of expectations of continued non-oil growth under the government’s wide-reaching USD 1.3 tn economic transformation scheme. This comes as large infrastructure projects are recalibrated to manage public finances and the hydrocarbon sector sustains its resilience to shocks.
What could drive a ratings upgrade: “We could raise the ratings over the next two years if reforms lead to steady growth in GDP per capita supported by continued momentum in non-oil growth,” S&P wrote.
Non-oil growth is on a positive trajectory: Saudi’s non-oil GDP growth is expected “to remain solid, fueled by the Vision 2030 boom in consumer spending, tourism, and construction,” S&P said in a separate report ahead of the rating action. The agency expects oil activities to have a smaller share of GDP, dropping to 24-26% (down from c.30%) of the Kingdom’s GDP as Vision 2030 projects drive domestic demand. S&P also sees non-oil growth being supported by growing investments in tourism, logistics, and manufacturing, alongside the recalibration of giga-project timelines to avoid overheating the economy.
Oil reserves are still key to keeping the economy on an even keel: The Kingdom’s vast hydrocarbon reserves and low-cost production have so far acted as a buffer against the effects of global energy transitions. As the world’s largest swing oil exporter, the country is likely to retain its influence over global oil markets even “in a future scenario where fossil fuel demand will largely be met by a smaller number of the most efficient producers,” according to S&P.
And to support spending on diversification plans: The hydrocarbon sector has been a key source of funding for diversification plans, with the government earmarking performance-linked dividends from Aramco towards powering infrastructure investments. The oil major’s decision early this year to shelve plans to increase its maximum sustainable capacity target should lower its capex and possibly lead to greater dividend payouts.
Despite an expected uptick in leveraging to finance megaprojects, Saudi’s net asset position is expected to “remain comfortably strong” into 2027, S&P Global said. Saudi’s net asset position is seen as holding above 40% of GDP for the next few years — down from an estimated 60% in 2023 — even with more borrowing by the government and PIF. Nevertheless, Saudi Arabia has rescheduled some of its project timelines to avoid overburdening its finances.
Some risk remains: A sharper-than-expected fall in oil prices could challenge the positive outlook. Falling oil revenues could interfere with the implementation of diversification plans by placing a strain on public finances, supply chains, as well as the availability of skills, infrastructure, and housing. Slower GDP growth and an increase in geopolitical instability could also lead to a downward revision to outlook and ratings.
But there’s promising momentum ahead: S&P sees continued reforms boosting GDP per capita, with non-oil sectors expanding rapidly. Efforts to enhance domestic capital markets and workforce Saudization are also growth factors, alongside an expectation that FDI and portfolio investments will “gradually increase from a low base,” thanks to the new investment law which levels the playing field for foreign investors.
OTHER KEY INDICATORS-
Real GDP: S&P projects GDP growth to settle at 1.4% this year on OPEC-mandated oil production cuts, before picking up to 5.3% in 2025, 4% in 2026 and 3.6% in 2027.
Fiscal deficit: The credit rating agency sees the government running deficits of 2% to 3% of GDP until 2027 on the back of large public investments.
Inflation: The Kingdom’s consumer price index is projected to average around 1.8%, stabilizing over the next few years at around 1.6%, thanks to food and fuel subsidies as well as the USD peg, with the caveat that further Red Sea-linked supply chain disruptions could turnaround those estimates.
Sovereign debt: Government debt is expected to rise gradually to 28% of GDP by 2027, up from about 22% in 2023, but will be cushioned by SAMA and the PIF’s reserves.
Oil prices: Brent crude prices will stabilize around USD 85 / bbl in 2024, dropping slightly to USD 80 per barrel from 2025 to 2027.
Oil production: Saudi’s oil production is forecasted to average 9 mn bbl / d this year, down from 9.6 mn bbl / d in 2023.
