As the greatest economy in the Arab world continues to recover from the Covid-19 outbreak thanks to increasing oil prices, rising oil output, and the government’s reform agenda, S&P Global Ratings has confirmed Saudi Arabia’s rating at “A-/A-2” with a positive outlook.
The A-/A-2 rating indicates the obligor’s strong capacity to meet its financial commitment.
“The positive outlook reflects Saudi Arabia’s relatively robust GDP growth and fiscal trajectory tied to the country’s improved oil and non-oil sector dynamics, ongoing structural reforms and continued emergence from the pandemic,” the rating agency said on Sunday.
Saudi Arabia’s economy continues to recover from the pandemic-induced slowdown amid higher oil prices and a rise in production, as the Opec group, led by Saudi Arabia and Russia, unwinds record production cuts put in place in 2020.
The group also decided to increase production by 100,000 barrels per day for this month on expectations of higher demand. But it decided to cut output by the same volume for October amid the Covid-19 lockdowns in China, the world’s largest importer of oil.
Demand for Saudi crude is also rising due in large part to the Ukraine conflict as western countries seek alternative supplies and reduce Moscow’s oil revenue.
Saudi oil production will average about 10.5 million bpd in 2022, compared with 9.1 million bpd in 2021, 9.2 million in 2020, and 9.8 million in 2019, S&P said.
The rating agency expects Brent oil prices to average about $103 per barrel in 2022, $85 in 2023 and $55 from 2024.
“Since the war in Ukraine erupted in late February, demand for Saudi hydrocarbons and petrochemicals has been underpinned by Western Alliance countries [including the US, the EU, the UK and Japan] wanting to swiftly secure alternative suppliers as they attempt to sharply reduce hydrocarbon imports from Russia,” S&P said.
“Macroeconomic reforms, including efforts to drive non-oil economic growth via investment and mega-projects, widen the non-oil tax base, and decouple the oil price from fiscal plans, should also help support GDP growth and fiscal balances.”
The rating agency projects Saudi Arabia’s gross domestic growth to reach a 10-year high of 7.5 per cent in 2022 amid higher oil prices.
The kingdom’s non-oil sector growth also remains strong, with “robust services growth as the economy continues to rebound after the pandemic”, it said. The country’s economy benefits from large public investment projects, funded by the Public Investment Fund and National Development Fund, it said.
With more than $620 billion in assets under management at the end of the first quarter of 2022, PIF is one of the largest sovereign wealth funds in the world. It is playing an important role in the diversification of the country’s economy and is investing in a number of projects in the kingdom including the $500bn Neom economic zone, the Qiddiya project in Riyadh and a tourism project at the Red Sea, among others.
“Given sharply increased oil volumes and prices in 2022, we forecast a general government budget surplus of 6.3 per cent of GDP in 2022, the first since 2013. We forecast a further surplus of 3.5 per cent in 2023 before a fall in prices leads to a return to deficits in 2024 and 2025,” S&P said.
Despite the effect of the conflict in Ukraine on global food and fuel prices, inflation in Saudi Arabia has remained largely under control owing to supply-side price caps and the dollar peg.
“We forecast inflation at 2.5 per cent in 2022, before rising to 2.7 per cent in 2023 and averaging 2.2 per cent in 2023-2025,” the rating agency said.
Dewa would purchase the power produced by the project under a long-term power purchase agreement (PPA).
