Dubai: Credit rating agency Moody’s Investors Service has changed the outlook on the Government of Saudi Arabia to stable from negative and affirmed its long-term issuer and senior unsecured ratings at A1.
“The change of outlook to stable reflects increased likelihood that, in the next several years, the government will reverse most of the 2020 increase in its debt burden while also preserving its fiscal buffers,” the Moody’s said in its latest rating update.
Improving fiscal situation
The rating agency said improving effectiveness of fiscal policy responses in periods of both low and high oil prices that consistently demonstrate a commitment to fiscal consolidation and longer-term fiscal sustainability. The expected fiscal improvement over the next several years will be facilitated by higher oil prices, although the stable outlook also takes into account the expectation that oil prices will remain volatile.
Over the next decades, Moody’s expects oil exports to produce less robust revenues at peak oil prices and weaker revenues at trough oil prices compared to historical experience because global initiatives to limit the adverse impacts of climate change will increasingly constrain the use of hydrocarbons and accelerate the shift to less environmentally damaging energy sources.
Moody’s expects that some of the 2020 spending cuts will be permanent, facilitating further reductions in overall spending during 2021-23 as the pandemic-related fiscal support is gradually withdrawn. Moody’s expects that overall spending will likely decline by around 6 per cent this year, whereas the draft 2022 budget targets another 6 per cent reduction (equivalent to around 2 per cent of GDP) next year, despite higher oil prices, which in the past often led to increases in expenditure.
Robust non-oil sector
Although higher oil prices will contribute significantly (about two-thirds) to the projected fiscal improvement this year, Moody’s expects that this improvement will be sustained in the medium term because of the government’s commitment to further fiscal consolidation over the coming years, including under the newly announced Fiscal Sustainability Programme (FSP).
The FSP builds on the Fiscal Balance Program measures and reform initiatives implemented during the past five years, which increased non-oil revenue to more than 18 per cent of non-oil GDP in 2020 from less than 10 per cent in 2015 and reduced non-interest expenditure to 53 per cent of non-oil GDP from 56 per cent in 2015. The FSP aims to further enhance fiscal discipline, improve effectiveness of public finance management, support the rebuilding of fiscal buffers by adopting fiscal rules and by transitioning to a multi-year budgeting process, which will also better align the forward-looking fiscal framework with national expenditure priorities.