Saudi Arabia's Baa2 foreign currency ceilings and stable outlook are based on the kingdom's position as the world's largest oil exporter and holder of the world's largest proven oil reserves, Moody's Investors Service said in its annual report on the country. Moody's upgraded Saudi Arabia's ratings in June as geopolitical risk stemming from the Iraq war diminished.
"Despite the recent withdrawals of US forces from Saudi soil that, on the surface, might signal a downgrading in its explicit security arrangement with the United States, Saudi Arabia continues to enjoy external protection that would be available in an extreme-case scenario," says Adel Satel, a Moody's vice president/senior credit officer and author of the report.
"The kingdom's dominant oil market position confers strategic importance and security guarantees from the US and other industrialized nations."
A politically sensitive reform process geared towards restraining spending increases and attracting new private investment in infrastructure, manufacturing, and the oil sector has been under way for the past several years.
The recent privatization of the Saudi Telecommunication Company signaled a significant improvement in the government's credibility as regards further reforms, says the Moody's report.
"The developing geopolitical environment has heightened the need to implement badly needed social, political, and economic reforms, the pace of which has so far been very slow," says Satel.
"The upside potential for the ratings is contingent on the ability to implement effective political and economic reforms in a timely manner."
The ongoing fiscal dilemma posed by a large and rapidly growing population against the volatility in oil income represents an important challenge for the Saudi economy and a key rating driver, said Moody's.
"The political imperative to meet expenditure pressures in recent years resulted in overspending and a sizeable budget deficit, leading to a build-up in public debt," says Satel. The kingdom's weak fiscal position is characterized by a high dependency on oil revenues, a low tax base, and a rigid level of expenditures. Such deficits have led to an onerous domestic debt.”
“However, concerns over high debt ratios are somewhat mitigated by the fact that the majority of the debt is held by government-owned agencies, allowing a higher degree of maneuverability in the management of general government debt.”
A prudent monetary policy has led to a stable currency and interest rates, noted the rating agency. Saudi Arabia's stable outlook reflects a balance between the country's fiscal vulnerability to swings in oil prices, and its ability to withstand those shocks, thanks to its high maneuverability in debt management, a solid external liquidity position, and a stable monetary and banking system.
Moody's explained that limited real Gross Domestic Product (GDP) growth of 0.74 percent in 2002 was due mainly to a decline in the oil sector following production cutbacks. However, the 4.2 percent growth in the real private sector reflects the rising economic contribution of the private sector. Fiscal performance continues to disappoint with a deficit of nearly three percent of GDP in 2002 that was driven mostly by the inability to rein in expenditures. — (menareport.com)
© 2003 Mena Report (www.menareport.com)
