Moody's Affirms Saudi Arabia's A1 Ratings, Maintains Stable Outlook

Transcription

1. Rating Action : Moody's affirms Saudi Arabia's A1 ratings, maintains stable outlook Global Credit Research - 13 Apr 2018 Frankfurt am Main, April 13, 2018 -- Moody's Investors Service ("Moody's") has today affirmed the Government of Saudi Arabia's long-term issuer and senior unsecured ratings at A1. The outlook remains stable. The affirmation of Saudi Arabia's A1 ratings is supported by the following key rating factors: (1) Moody's baseline view that the fiscal consolidation expected at the time of the last rating action will continue over the medium term, ensuring stabilization of the government's debt burden below 30% of GDP. (2) Moody's continuing expectation that the government's ambitious structural reform agenda will, over time, reduce the exposure of Saudi Arabia's economy and public sector balance sheet to oil prices, balanced against the associated execution risks given the large scale of the task at hand and the potentially negative short-term economic and social impact of some of the related measures. The stable outlook indicates that the risks to the ratings are broadly balanced. The government's reform program, including the plans to balance the fiscal budget by 2023, could over time offer a route back to a higher rating level. However, social pressures could in the next few years slow or reverse the reform progress in a way that would lead to erosion of Saudi Arabia's fiscal strength beyond current expectations. In a related action, Moody's also affirmed the Government of Saudi Arabia's senior unsecured MTN rating at (P)A1. Moody's has also affirmed the A1 senior unsecured rating and the (P)A1 senior unsecured MTN rating of KSA Sukuk Limited, a special purpose vehicle incorporated in the Cayman Islands, whose debt is in our view ultimately the obligation of the Government of Saudi Arabia. Saudi Arabia's long-term foreign-currency bond and bank deposit ceilings remain unchanged at A1, and the short-term deposit ceilings remain unchanged at Prime-1. Saudi Arabia's long-term local-currency country risk ceilings remain unchanged at A1. RATINGS RATIONALE RATIONALE FOR AFFIRMING THE A1 RATINGS FISCAL CONSOLIDATION EXPECTED OVER THE MEDIUM-TERM WILL STABILIZE GOVERNMENT DEBT BURDEN BELOW 30% OF GDP Lower oil prices since 2014 have led to a significant deterioration in Saudi Arabia's fiscal position with the budget deficit rising from 2.3% of GDP in 2014 to almost 13% in 2016 (17% if the settlement of government payment arrears from previous years is included) and the government debt rising from 1.6% of GDP in 2014 to 13.1% in 2016 and just over 17% by end-2017. In response, the government has implemented a number of measures to contain the fiscal deterioration. These included deep cuts in capital expenditures (-64% between 2014 and 2016) through project cancellations and reprioritization and similarly large reductions in government spending on goods and services (-44% between 2014 and 2016) through a spending rationalization exercise. The initial policy response was followed by the announcement of an ambitious medium-term Fiscal Balance Program (FBP) in December 2016 which aimed to eliminate the budget deficit altogether by 2020. The key elements of the FBP were (i) energy and water pricing reforms spread over five years and aimed at removing an implicit government subsidy which would boost the transfers to the budget from the state oil company and the state-owned utilities, (ii) the introduction of a number of new non-oil revenue measures, including excise taxes on tobacco and sugary beverages, a value added tax (VAT) of 5%, new and increased expatriate levies, and luxury tariffs, and (iii) further expenditure savings through improvements in current and capital spending efficiency. With that context, Saudi Arabia's fiscal performance since Moody's last rating action in May 2016 has been broadly in line with Moody's expectations after adjusting for the fact that oil prices turned out to be substantially
2. higher than Moody 's original assumption. Importantly, Moody's estimate of the fiscal break-even oil price has declined from $95/bbl in 2015 to around $84/bbl in 2017, indicating that part of the reduction in the budget deficit to around 9% of GDP in 2017 was due to expenditure cuts and newly introduced non-oil revenue measures. Due to better than expected overall fiscal performance and the government's use of its sizeable financial assets to finance a portion of its borrowing requirement, the government debt burden rose to 17.3% of GDP at end-2017 compared to Moody's original expectation of close to 28% of GDP. Against this increased fiscal headroom, it is Moody's view that the modification of the FBP announced in January 2018 to delay the achievement of a balanced budget to 2023 instead of 2020 makes the fiscal reform momentum more sustainable, the fiscal targets more realistic, and the overall fiscal consolidation and diversification program more credible. A more relaxed consolidation will allow for smoother absorption of energy and water price increases by the consumers and businesses and create room to support non-oil economic growth through targeted support programs, such as the private sector stimulus package of SAR72 billion (2.6% of estimated nominal 2018 GDP) announced in December 2017. Even so, the consolidation path will not be straightforward. While the authorities' intention of adhering to fiscal targets is clear, the potential for extra-budgetary slippage is illustrated by the decision in January to use a royal decree to commit additional expenditure to alleviate hardship and minimize discontent resulting from fiscal tightening, expenditure which in Moody's view is likely to be sustained beyond the current year. In that case the additional cost, at least for the current year, will be met using some of the proceeds of the anti-corruption campaign. But that may not be possible in future, and in any event the significance of the decision lies in part in the illustration of the delicate balance being walked between the twin objectives of strengthening government finances and maintaining social stability. Nevertheless, in Moody's baseline scenario, which assumes oil prices average $60/bbl during 2018-2019 and then remain within the medium-term forecast range of $45-$65/bbl, Saudi Arabia's fiscal deficits will continue to fall over the medium term, which, combined with some budget financing from fiscal reserves, will ensure that the government debt burden peaks below 30% of GDP over the next five years. In the meantime, Saudi Arabia will continue to have strong fiscal and external buffers, including foreign reserves which we project will rise above $550 billion over couple of years. This baseline scenario assumes that most of the announced and planned fiscal measures will be implemented with only a limited amount of slippage. AMBITIOUS STRUCTURAL REFORM AGENDA WILL GRADUALLY REDUCE THE EXPOSURE OF SAUDI ARABIA'S ECONOMY AND PUBLIC SECTOR BALANCE SHEET TO OIL PRICES In addition to the medium-term fiscal balance program, the government continues to pursue a comprehensive structural reform agenda intended to diversify Saudi Arabia's economy away from reliance on oil production and public sector spending to generate income and employment. The main elements of the program are detailed in the National Transformation Plan (NTP) 2020 published in June 2016 and then streamlined into 12 vision realization programs with five-year rolling delivery plans, targeted initiatives and measurable objectives in April 2017. A set of legislative, regulatory, educational and social reforms are planned or in progress, aimed at improving Saudi Arabia's business and investment climate and supporting growth in non-oil private sector GDP over the medium to long term. The diversification drive will initially be also boosted by several large-scale investment projects focused on the underdeveloped tourism and entertainment sectors, which will be financed partly from the resources of the government-owned Public Investment Fund. In Moody's view, political support behind the reform momentum remains very high and the ownership of the reform program has deepened beyond the Council for Economic and Development Affairs led by Crown Prince Mohammad bin Salman. Furthermore, a number of leadership changes and reorganizations at the key economic ministries indicate a gradual strengthening of the institutional capacity to implement reforms. So does steady, if slow and at times halting, progress on some key legislative and regulatory initiatives implemented or announced since the last rating action in 2016, such as the new bankruptcy law, that will over time boost non-oil private sector growth, including in small and medium-size enterprises. If progress is maintained in line with Moody's expectations, the reforms will help to sustain the recent increase in the relative size of the non-oil sector of the economy even as the oil sector recovers, and gradually reduce the vulnerability of Saudi Arabia's economy and public sector balance sheet to declines in oil prices. This view takes into account the risks to the execution of the reforms planned and announced by the government to date. The large scale of the task at hand is reflected most prominently in the rigidity of the labor market and relatedly in the challenges facing the Saudi education system in raising skill levels needed to develop the economy, and the high social pressure to maintain the existing living standards for the Saudi
3. nationals in the face of high unemployment and rapid population growth . Furthermore, the government's reform agenda is still in its initial stages, with many of the large investment projects still in planning and not expected to come on line before 2020 at the earliest. This is why the progress towards the NTP's ambitious macroeconomic targets -- such as increasing the private sector's contribution to GDP from 40.5% to 65% by 2030, increasing the share of non-oil exports of goods and services in non-oil GDP from 16% to 50% and reducing the unemployment rate among Saudis from 11.6% to 7.0% -- has been slow, with some indicators (e.g. the unemployment rate) moving in the opposite direction due to the weaker overall growth environment over the past two years. The key obstacles to economic diversification -- including mismatched job market skills and inflated reservation wages for most unemployed Saudis -- will take a long time to resolve. While the government is taking steps to address these, e.g. through the planned education reform and by sponsoring vocational training programs, execution risks are high. They will remain so for some years to come. RATIONALE FOR THE STABLE OUTLOOK The stable outlook indicates that the risks to the ratings are broadly balanced. Success in achieving the government's reform program, including the plans to balance the fiscal budget by 2023, could over time offer a route back to a higher rating level. Upward pressure on the rating would come from the combination of diminishing exposure to fluctuations in oil prices as reflected in lower fiscal and external breakeven oil prices, a rebuilding of the government's net financial assets towards the levels before 2014, and a durable strengthening of the growth outlook for the non-oil private sector. By the same token, failure to achieve the government's broad objectives, with high economic and fiscal reliance on oil remaining a key feature of Saudi Arabia's credit profile, would cause downward pressures to intensify and would probably result in the rating being lowered over time. It remains to be seen whether social pressures and/or the policy challenges associated with coordinating such a broad reform program may slow or reverse progress and lead to erosion of Saudi Arabia's fiscal strength beyond current expectations and undermine medium- to long-term growth prospects. Meanwhile, geopolitical risks -- dominated by the regional tension with Iran, including through the war in Yemen -- are a source of low-likelihood but potentially very high impact downside risk should an escalation lead to disruptions, for example of Saudi Arabia's exports through the Strait of Hormuz. However, it is Moody's view that these risks are mitigated by being at least in part within the control of the government which has a strong incentive to avoid any outcome that would jeopardize its progress by diverting financial and institutional resources from its long-term social and economic goals. WHAT COULD MOVE THE RATING UP/DOWN Increasing confidence that the reforms aimed at reducing the reliance of Saudi Arabia's economy and public finances on oil revenues are more effective than Moody's has previously assumed could, over time, support a higher rating. The success of such reforms would likely be reflected in fiscal deficits falling more quickly than currently envisaged and the government debt burden peaking at a lower level and earlier than expected, independent of fluctuations in oil prices; and growth recovering more rapidly from a broadening economic base. A durable reduction in regional political and security threats would also allow for upward migration of the rating. A combination of the following factors would put downward pressure on the rating: a material slowing of fiscal consolidation, such as reflected in persistently large fiscal deficits and a faster rise in government debt ratios than in our baseline scenario; the conclusion that the reform effort will fall substantially short of its economic and fiscal objectives, leaving Saudi Arabia prone to further shocks in the oil market; renewed and sustained pressure on the exchange rate and a faster depletion of foreign exchange reserves; an escalation of regional geopolitical risks and/or signs of deteriorating domestic political and social stability that would jeopardize reform progress. GDP per capita (PPP basis, US$): 55,331 (2016 Actual) (also known as Per Capita Income) Real GDP growth (% change): 1.7% (2016 Actual) (also known as GDP Growth) Inflation Rate (CPI, % change Dec/Dec): 1.7% (2016 Actual) Gen. Gov. Financial Balance/GDP: -12.9% (2016 Actual) (also known as Fiscal Balance)
4. Current Account Balance /GDP: -3.7% (2016 Actual) (also known as External Balance) External debt/GDP: 20.7% (2016 Estimate) Level of economic development: High level of economic resilience Default history: No default events (on bonds or loans) have been recorded since 1983. On 09 April 2018, a rating committee was called to discuss the rating of the Saudi Arabia, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutional strength/ framework, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer's susceptibility to event risks has not materially changed. The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology. The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable. The Local Market analyst for these ratings is Alexander Perjessy, +971 (423) 795-48. REGULATORY DISCLOSURES For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com. For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity. Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review. Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating. Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Steffen Dyck VP - Senior Credit Officer Sovereign Risk Group Moody's Deutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Marie Diron MD - Sovereign Risk
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