Country Risk Rating

B
Political and economic uncertainties and an occasionally difficult business environment can affect corporate payment behavior. Corporate default probability is appreciable. - Source: Coface

Business Climate Rating

B
The business environment is mediocre. The availability and the reliability of corporate financial information vary widely. Debt collection can sometimes be difficult. The institutional framework has a few troublesome weaknesses. Intercompany transactions run appreciable risks in the unstable, largely inefficient environments rated B.

Strengths

  • Large financial resources
  • Efforts of modernization of the economy by opening it more to foreign investments
  • Key oil producer in the world, important position in OPEC
  • Diversification efforts outside of oil & gas (construction, retail, transport, services, etc.)
  • Peg to the US dollar fitted to the structure of the economy
  • Large population, strong willingness to consumption

Weaknesses

  • Slower growth performance
  • Increased perception of security risks after attacks on oil facilities
  • Rising price pressures squeeze corporate margins
  • High dependence on oil, exposure to oil price fluctuation
  • Costly and numerous public sector employment, still high energy subsidies

Current Trends

Growth dragged down by low oil prices, non-oil remains supportive

Continuous weakness in oil prices is putting downward pressure on Saudi growth, as mining including oil and gas accounts for almost 40% of GDP. Saudi Arabia, an OPEC member, will continue to over-comply with OPEC and non-OPEC countries’ agreement to cut oil production until March 2020. With the agreement to be extended beyond that date, the Saudi oil production seems to remain capped. The country’s oil production is supposed to be cut to 10.3 million barrel per day (b/d), nearly 322,000 b/d lower compared to the pre-agreement period. Yet, Saudi Arabia has been cutting even deeper its production to around 9.7 million b/d to support prices. Conversely, the government driven investment plans in various sectors such as infrastructure, housing, energy etc. will support growth. The new investments are partly financed by the Saudi Industrial Development Fund (SIDF) that has unveiled a series of financial services and products to support the private sector in September 2019. Authorities also seek to invest 1.6 trillion rials (nearly USD 430 billion) in the private sector over the next ten years, in infrastructure and industry, within the Kingdom’s economic diversification program: Vision 2030. Fiscal stimulus (annual allowances for public sector workers, inflation allowances, continuous payments under the Citizen Account Program etc.), will help private consumption to rise. Net exports will weaken in the upcoming period due to weak oil prices and lower oil production. On the other hand, import demand for machinery, raw materials and other intermediate goods necessary for domestic investments will continue. Saudi Arabia mostly imports machinery, electrical equipment, metal and chemical products, transport equipment and food products. Therefore, the current account surplus is going to further diminish. Latest PMI readings show that operating conditions in the non-oil private sector is improving. This trend is expected to continue in 2020 on the back of new order growth, despite softer external demand.

Wider budget deficit funded by reserves and debt issuances

In the short run, Saudi Arabia is not expected to revert back to fiscal austerity measures. As low oil prices hit oil revenue (accounting for nearly 70% of the total despite the recent introduction of VAT, expatriate fee and excise tax), authorities announced a wider fiscal deficit reaching 187 billion riyals (USD 49.9 billion and equivalent to 6.5% of GDP) compared to an estimated 131 billion riyals in 2019. The Saudi estimated fiscal break-even point stands at USD 84 per barrel for 2020 as per the IMF, which is another sign that the budget deficit will be sizeable in 2020, as it seems highly unlikely for oil prices to reach those levels. Moreover, recent attacks on Aramco’s two main oil infrastructures could incite the government to spend more on defense and security, leaving less resource for other sectors such as infrastructure, healthcare etc. On the other hand, Saudi Arabia has vast financial resources to meet its financing requirements. Wider budget deficits will be financed by a combination of foreign exchange reserves and debt issuance on domestic and external debt markets. As of September 2019, Saudi Arabia’s total outstanding direct indebtedness amounted to USD 174.8 billion, including USD 95.9 billion of domestic indebtedness and USD 78.9 billion of external indebtedness. Total foreign exchange reserves of the central bank stood at USD 500 billion as of September 2019, equivalent of nearly four years of imports and supportive of the peg to the dollar. The kingdom’s FDI outflows were around 2.5% of its GDP in 2018.

Domestic stability is expected to remain with few challenges ahead

Lower oil prices have changed the long-term attitude of the government from a closed economy towards a more open one where private sector is encouraged and austerity measures are implemented. Although this is not expected to create domestic instability, it may lead to a transformation of the society in the coming years. The Vision 2030 program, which aims to modernize the Saudi economy by opening it to further international investors, encouraging some new sectors such as technology and entertainment, and giving women a greater role in the working and social life, will also be playing a part in this change. The political status quo is expected to continue. Externally, tensions with Iran can increase potential political risks for Saudi Arabia. On the other hand, the Saudi-led military coalition was confronting the Iran-backed Houtis in Yemen. The indirect rapprochement between Saudi Arabia and Houtis can play an important role to pave the way for further talks during 2020.

Source:

Coface (02/2020)
Saudi Arabia