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GROWTH FUNDAMENTALS STRONG

S&P ratings boost for Saudi Arabia

Riyadh, May 29, 2013

Standard & Poor's (S&P) has revised its outlook on the long-term sovereign credit ratings on Saudi Arabia to positive from stable owing to its view that the Kingdom's economy expanded strongly and steadily during 2005-2012.

The US ratings agency pointed out that the growth fundamentals have strengthened in Saudi Arabia with real per capita GDP growth averaging 3.1 per cent.

In its review, S&P said, "The outlook revision reflects our opinion that we could upgrade Saudi Arabia during the next 24 months if economic growth remains strong. In our view, continued growth would help to reduce the country's social challenges, including unemployment, and enhance productivity and competitiveness."

At the same time, the ratings agency has affirmed the long- and short-term foreign and local currency sovereign credit ratings at 'AA-/A-1+'. The transfer & convertibility (T&C) assessment for Saudi Arabia remains unchanged at 'AA+', it said.

"A long track record of high and steady non-oil growth, averaging 8 per cent during 2005-2012, has contributed to overall average real GDP growth of 6.5 per cent," it stated in the report.

"In our opinion, the improved growth prospects for the non-oil economy will bolster the economy's resilience to exogenous shocks such as a decline in oil prices," it added.

According to S&P, the ratings are supported by Saudi Arabia's very strong external and fiscal positions, which have built up over several years. By managing high oil revenues prudently, the government has virtually eliminated its general government debt, generating additional fiscal space for countercyclical policies.

Foreign currency assets under the Saudi Arabian Monetary Agency's management exceeded 90 per cent of 2012 GDP at end-March 2013. We also note that Saudi Arabia continues to make progress in transparency and data frequency and availability.

"The ratings are constrained by our view that Saudi's political institutions are at early stages of development compared with most sovereigns in the ‘AA’ category. Given the Saudi riyal's peg to the US dollar, we view monetary policy flexibility as limited, which also constrains the ratings," it stated.

S&P in its review said it expected the real per capita growth in 2013 to reach 1.6 per cent, down from its estimate of 3.8 per cent growth for 2012. "The slowdown is mainly due to an expected decrease in Saudi oil production in line with softening demand for oil globally and additional supplies from other sources coming on-stream," it added.

The improved growth fundamentals for the non-oil economy also reflect the government's fiscal policy flexibility. It has been able to stimulate the non-oil economy with public spending, which has helped boost private-sector activity, according to the US ratings agency.

Much of the spending has been channeled toward physical and social infrastructure in support of the country's economic diversification agenda, it said.

"We believe the government will continue to register strong fiscal and current account surpluses, which we estimate at 11 per cent and 20 per cent, respectively, this year. We base this on our assumption of a broadly unchanged average oil price in 2013. We also expect government extra-budgetary spending to narrow this year compared with levels seen during 2011-2012," it added.

S&P said the Saudi government has also been actively addressing structural issues, including the availability of housing and housing finance, as well as tackling labor market imbalances.

"Notwithstanding isolated episodes of unrest in the eastern province, we expect the domestic political environment to remain broadly stable. We expect Saudi leadership to continue on the path of gradual and cautious reform while also delicately balancing the different religious and cultural views in the country," it stated.

The US ratings agency pointed out that the geopolitical risks in the region remain elevated, particularly in view of increasing sectarian strife, including from the conflict in Syria.

"We believe that Saudi leadership will remain primarily focused on maintaining domestic stability and insulating the kingdom from external developments. At the same time, we expect that Saudi will continue to play a role in limiting Iran's influence in the region and hence will be indirectly involved in regional developments."

"These risks, however, may be partly mitigated by Saudi Arabia's strong regional and international alliances," said S&P.
 
"The ratings will likely remain at their current levels if, in our view, Saudi Arabia's growth trajectory falters, or if there are policy slippages that could derail the accumulation of foreign reserves," it added.-TradeArabia News Service




Tags: economy | Saudi | S&P | Ratings |

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