• US’ Moody’s Investors Services says Saudi Arabia remains in a strong financial position, but there is pressure on the ratings
  • Moody’s projects that budget deficits will continue in double figures until 2018
  • This would lead to government debt rising to 28.5 per cent of GDP, while government deposits in the central bank fall below $200m by 2018

Projected budget deficits in Saudi Arabia will put downwards pressure on its rating, according to a research report from Moody’s Investors Services.

It emphasises that Saudi Arabia still has a good fiscal position from 2014.

This comes after competitor Standard & Poor’s (S&P) downgraded its Saudi Arabia rating to AA-/A-1+ with a negative outlook. Saudi Arabia condemned the downgrade and ended its relationship with S&P.

Moody’s projects a $110bn deficit for the kingdom in 2015, or 17 per cent of GDP. Based on a scenario of oil prices gradually rising from 2017, Moody’s expects the deficit to be steady at 17.1 per cent of GDP in 2016, then fall slightly to 13.2 per cent of GDP by 2018, assuming slight increases in spending.

This is more negative than S&P’s outlook, which projects the budget deficit will be reduced to 10 per cent of GDP in 2016, 8 per cent in 2017 and 5 per cent in 2018.

Saudi Arabia’s economic outlook  
End of year 2015 2016 2018
  Real GDP growth (%)
Moody’s 2.8 2.7
Standard & Poor’s 3.2 2.5 3
  Fiscal deficit (% of GDP)
Moody’s -17 -17.1 13.2
Standard & Poor’s -16.1 -10 -5
  Government debt (% of GDP)
Moody’s 6.4 11.8 28.5
Standard & Poor’s 3.9 8.8 22

However, Saudi Arabia is starting from a strong fiscal position, according to Moody’s, thanks to average government surpluses of 11 per cent of GDP between 2004 and 2014. This resulted in Saudi Arabian Monetary Authority (Sama), the central bank, holding reserves equivalent to 99 per cent of GDP and government debt of just 1.6 per cent of GDP in 2014.

If the recent trend of low oil prices and fiscal deficits continues, Saudi Arabia’s net financial position will deteriorate significantly.

Given its baseline scenario described above, and assuming that from next year Riyadh will finance two-thirds of its deficit through debt issuance, government deposits at Sama the will fall to less than $200m (23 per cent of GDP) by 2018. Government debt would rise from 1.4 per cent of GDP in 2014 to 28.5 per cent of GDP.

A more negative scenario, in which oil prices do not recover and higher government spending increases, projects Sama deposits dropping to less than 20 per cent of GDP. Government debt would rise to 35.5 per cent of GDP by 2018.

Saudi Arabia has overshot its budget by 28 per cent over the last five years. Moody’s projects a 19 per cent overspend in 2015, as recent spending measures kick in.

Moody’s expects budget consolidation measures for the foreseeable future. These could impact capital spending the most. Cutting the public sector wage bill, which makes up more than 38 per cent of spending, is politically difficult.

Government spending and oil exports are key drivers of GDP growth, even in the private sector. Moody’s forecasts that GDP growth will slow to 2.5-3 per cent over the next two years.