Fitch Upgrades Saudi Arabia’s Credit Rating, As Tensions With Iran Ease

Fitch Ratings has upgraded Saudi Arabia’s credit rating by one notch, from A to A+, citing its strong fiscal and external balance sheets, relatively low debt levels and plentiful sovereign and other public sector assets.

The upgrade announced on April 5 assumes Saudi Arabia’s current fiscal, economic and governance reform program will continue. The ratings agency said the economy’s continued reliance on oil and gas revenues, along with its weak governance indicators and its vulnerability to geopolitical shocks remained points of weakness, although it said there were “some indications of improvement in these factors”.

In particular, it said the recent steps taken towards Saudi-Iranian détente “hold the hope of reduced regional risks”. A new modus vivendi between Riyadh and Tehran could hold the key to resolving the civil war in Yemen. The foreign ministers of Saudi Arabia and Iran are reportedly due to hold their first face-to-face talks in Beijing in the coming days.

Riyadh had foreign reserves of some $459 billion at the end of 2022, which Fitch predicted would fall to around $445 billion in 2023/24. It said it expected outward investment by large institutions such as the state-owned Public Investment Fund (PIF) and pension funds to “moderate”.

The government ran a budget surplus of 2.5% of gross domestic product (GDP) in 2022, but this is expected to evaporate this year, amid a combination of lower oil prices and production. Fitch expects Riyadh to run a budget deficit next year, amounting to 1.2% of GDP – assuming oil prices fall slightly further to $75 a barrel.

Non-oil revenue is rising, but not by enough to offset the changes in the oil markets. One area where non-oil revenue has been rising is from taxation, after the government introduced a value-added tax (VAT) in January 2018. That was originally set at just 5%, but was tripled to 15% in July 2020.

Crown Prince Mohammed Bin Salman told the Liwan Al Mudaifer Show on the local Al Arabiya television network in April 2021 that “It’s a temporary decision. It will continue for a year, maximum five years, and then things will go back to what they were.”

However, there has been no sign of the government reversing the tax rise and Fitch said it expects the VAT rate to remain at 15%.

While the PIF is expected to reduce its overseas investments, it is pouring ever more money into the domestic economy – at a time when international investors appear reluctant to do so. Fitch expects PIF spending on ‘giga projects’ such as the futuristic city of Neom in the remote northwest of the kingdom to underpin non-oil private sector growth of 5% this year and 4% in 2024/25.

Even so, oil revenues are expected to account for around 60% of total government revenues in 2023/24 – that high dependence remains a rating weakness, according to Fitch, although it acknowledged it has come down from 90% of GDP a decade ago.

Fitch also warned that rising public-sector spending outside the budget, including on those giga projects, was a “medium-term risk” to the sovereign’s balance-sheet strengths, although it could offer other benefits such as the creation of more jobs and sustained higher non-oil GDP growth.

The unemployment rate amount Saudis fell at the end of 2022 to 8% – the lowest level since records began in 1991.