Moody’s upgraded Saudi Arabia’s sovereign credit rating to Aa3 from A1, while downgrading its outlook to stable from positive, according to a statement (pdf). The revision marks the first time that the agency upgrades Saudi’s sovereign credit rating since it first began assessing the Kingdom in 2016, with the step up now placing the Kingdom on par with Hong Kong and Belgium, Bloomberg said. The story was also covered by Reuters.

The upgrade sees Saudi’s sovereign long-term local and FX issuer and senior unsecured ratings bumped up to Aa3 from A1, while sovereign local and FX medium-term note program ratings notched up to (P)Aa3 from (P)A1.

The agency also upgraded KSA Sukuk Limited’s backed senior unsecured ratings to Aa3 from A1, and the backed medium-term note program rating to (P)Aa3 from (P)A1. The sukuk issue is a Cayman Islands-registered special purpose vehicle owned by the Saudi government, with its debt representing obligations to the Saudi state. Saudi’s local currency (LC) and foreign currency (FC) country ceilings also saw their ratings bumped up to Aaa from Aa1.

The rationale: Moody’s points to substantial progress and momentum in the Kingdom’s efforts to diversify income and promote a sustainable non-hydrocarbon economy. “Continued progress will, over time, further reduce Saudi Arabia’s exposure to oil market developments and long-term carbon transition,” the agency said. Additionally, the kingdom’s recent steps to promote fiscal prudence by recalibrating spending on megaprojects — including regular reviews to prioritize projects with maximum economic impact— also contributed to the upgrade. Although such reforms may delay some non-hydrocarbon sector projects, “the focus on macroeconomic and fiscal sustainability is credit positive,” Moody’s said.

The downgrade in Moody’s outlook on the Saudi economy comes on the back of “balanced risks to the rating at a higher level,” the ratings agency said. Although increased engagement from the private sector may result in an acceleration of diversification plans, there are “supply-side constraints” that may limit the pace of non-oil investments, particularly in the mining and industrial sectors. At the same time a weak outlook for oil and geopolitical tensions also present risks to diversification plans and the general economy.

Some projections: The Kingdom’s private sector non-hydrocarbon GDP is expected to grow at 4-5% annually, pegging the rate as among the quickest in the GCC, Moody’s says. Meanwhile, the ratings agency sees Saudi maintaining fiscal deficits of between 2-3% of GDP a year, assuming “the absence of large shocks to oil prices and production.” Oil prices are expected to drop from USD 82-83 / bbl in 2023-24 to USD 75 / bbl in 2025, and USD 70 / bbl in 2026-27 as Opec+ begins phasing out output cuts next year. Saudi Arabia’s public debt is also expected to hit 35% of GDP in 2030, up from 26% of GDP at the close of 2023.

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