S&P affirms Saudi rating on expected rebound through 2024

September 28, 2021

DUBAI (Reuters) – S&P Global Ratings on Tuesday affirmed Saudi Arabia’s A- (minus) credit rating with a stable outlook, expecting a rebound in growth through 2024 driven by higher oil prices, eased OPEC production quotas and a large vaccine rollout in the kingdom.

After the COVID-19 pandemic weighed on the economy, Saudi Arabia has returned to ambitious investment projects linked to its strategy of weaning the economy off oil, S&P said. Significant investments are being made by the Public Investment Fund, the kingdom’s sovereign wealth fund, and other entities in both the oil and non-oil sectors.

The rating agency sees Saudi Arabia’s deficit dropping from 11.2% last year to 4.3% in 2021, while averaging 5.7% between this year and 2024. Real GDP growth is expected to average 2.4% in the same period after contracting 4.1% in 2020.

“In 2021, higher oil prices are being partially counterbalanced by constrained annual Saudi oil production volumes, which continue to be limited by an OPEC deal,” S&P said in a mid-year review.

“However, a monthly easing of quotas through 2021 and 2022 will support the Saudi oil sector and economy.”

Megaprojects such as the planned futuristic city Neom “will be driven forward”, although “funding pressures may impede their pace and some investors have raised questions over some of the projects’ potential profitability,” S&P said.

Gross debt is expected to continue to increase until 2024 as deficits are partly funded by public debt issuance, though Saudi Arabia will stay in a net asset position on its fiscal and external balances, S&P said. Reserves between 2021 and 2024 are expected to cover an average of 15 months of current account payments.

A significant strengthening of net asset position or improvement in growth prospects could lead S&P to raise ratings, it said.

“We could lower our ratings if we observed fiscal weakening and an erosion of the government’s net asset position beyond our expectations, or a sharp deterioration in the sovereign’s external position,” the agency said.

“A sustained rise in domestic or geopolitical instability that posed a significant and continued threat to the oil sector could also weigh on the ratings.”

Geopolitical risks, especially concerning Iran and Yemen, remain, but recent overtures could help improve tensions, S&P said.

(Reporting by Yousef Saba, Editing by William Maclean)

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