London, Asharq Al-Awsat- Fitch Ratings has today upgraded the Kingdom of Saudi Arabia’s foreign currency and local currency Issuer Default ratings (“IDR”) to ‘A+’ from ‘A’, and affirmed the Short-term rating at ‘F1’. The Outlooks remain Stable. At the same time the agency has revised Saudi Arabia’s Country Ceiling rating to ‘AA-‘(AA minus) from ‘A’.
“The upgrade is due to strengthened external and domestic balance sheets, ongoing economic and structural reforms, reflected in an accelerating pace of private sector growth, and a reduction in domestic political risk,” says Richard Fox, Head of Fitch’s Middle East and Africa sovereign ratings.
As the world’s leading oil exporter, Saudi Arabia is the prime beneficiary of higher oil prices. Fitch expects the 2006 fiscal and current account surpluses to be maintained at over 30% and 20% of GDP, respectively. In absolute terms and scaled for economic size, Saudi Arabia’s net external creditor position is rivaled only by China (rated ‘A’) and Taiwan (rated ‘A+’) in the ‘A’ rating category, without taking into account the substantial foreign assets of the non-bank private sector. Moreover, as one of only a select few sovereigns with no public sector external debt, the narrower public net external creditor position is exceeded by only five Fitch-rated sovereigns – all of them rated ‘A+’ or above. Part of the fiscal surplus is being used to retire domestic government debt. In gross terms Fitch expects this to decline to about 24% of GDP in 2006 while on a consolidated basis, netting out debt held by the wider general government, debt is projected to fall below 10% of GDP by year-end, amongst the lowest in the ‘A’ rating category. Taking into account of substantial domestic assets, Saudi Arabia is a net domestic creditor.
Although the dependence of public and external finances on oil revenues leaves Saudi Arabia exposed to potential oil price volatility, Fitch is confident that the ratings are able to absorb substantially more oil price downside than the agency currently expects.
High oil prices have not dulled the pace of economic and structural reform, which aims to address the need to create jobs for Saudis in the private sector. Accession to the World Trade Organisation (“WTO”) in December 2005 marks the achievement of a critical mass of reforms and locks in future reforms. Saudi Arabia’s increasing integration into the world economy is a key reason for Fitch’s decision to raise the Country Ceiling rating by two notches to ‘AA-‘ (AA minus). This is the highest rating any issuer in the Kingdom can potentially attain. Progress is also reflected in a marked improvement in the business climate. Non-oil private sector GDP grew by almost 7% last year, the highest growth rate in two decades. Growth is set to accelerate further this year, with a number of ambitious projects in both the public and private sectors and with foreign investment also increasing. While more needs to be done to maximize the employment prospects of Saudis in the private sector, steps have been taken in the area of labor and education reform.
Saudi Arabia’s banking system is also a rating strength. The kingdom is one of only five emerging markets with a ‘B’ Banking System Indicator (“BSI”) in Fitch’s bank systemic risk assessment, denoting a strong banking system. The agency does not expect the recent stock market crash to bring any major systemic damage.
Although socio-political issues constrain the rating, Fitch judges these risks to have diminished over the past year or so. Continuity was affirmed last August with the smooth accession of King Abdullah, who remains a driving force behind the reform process. Incremental political reform is taking place, within the constraints imposed by a conservative society. Near-term risk from domestic terrorism has substantially diminished, due to limited domestic support and an effective security response.