S&P Global Ratings has affirmed its ‘A-/A-2’ long- and short-term foreign and local currency sovereign credit ratings on Saudi Arabia with the a stable outlook, as the rating agency expects the world’s largest oil producer will maintain a strong external and government balance sheet positions over until 2020.

US-based S&P said the ratings on Saudi Arabia, the largest Middle Eastern economy are supported by its strong external and fiscal stock positions, which it expects will be maintained despite significant central government deficits.

However, the ratings are constrained by weak economic growth, limited public sector transparency, and constrained monetary policy flexibility, S&P said in a statement.

“We project that the central government deficit will average about 7 per cent of GDP in 2017-19, after peaking at 17 per cent in 2016, up from 15 per cent a year earlier,” S&P said, adding that the widening of the deficit last year was largely a result of payment of government arrears of SR105bn ($28bn) to private-sector companies, which amounts to about 4 per cent of the kingdom’s GDP.

“We understand the government’s arrears have largely been to building and construction companies, a sector which accounts for about 8 per cent of total bank loans, equivalent to roughly one-third of the banking sector’s capital base,” according to S&P.

Riyadh has announced 2017 budget with target of about 8 per cent of GDP, and intends to achieve a balanced budget by the end of the decade under its Fiscal Balance Program 2020. S&P however expects the central government deficit of about 9 per cent of GDP in 2017, narrowing to 4 per cent by 2020.

“We largely base our more conservative view of the government’s fiscal consolidation prospects on our oil price assumptions, which are broadly flat over our forecast period through year-end 2020,” according to S&P statement, which added that the estimates include its expectation that Saudi Arabia’s oil production will remain at around current levels of 10 million barrels a day (b/d) in order to shore up prices, in line with Opec’s decision in late 2016.

The rating agency has also factored in in an additional 2 per cent of GDP in government revenues starting in 2019, due to the expected introduction of a 5 per cent value-added tax (VAT) in 2018.

In terms of borrowings, S&P forecast the annual average increase in net general government debt of about 2 per cent of GDP.

The kingdom is looking to privatise some of its assets to stimulate economic growth, improve the fiscal position, and contain the cost of public-sector salaries. Riyadh, in March, significantly reduced income tax rates for producers of hydrocarbons in the kingdom. The rate for the largest companies, including Saudi Aramco, the world’s largest oil exporter, has now dropped to 50 per cent from 85 per cent. The tax rate is in addition to a 20 per cent royalty payment the company makes to the government.

“The government will now be incentivised to encourage Saudi Aramco to follow a generous dividend policy to compensate for the reduction in tax revenues. In this way, the interests of investors and the government will be more aligned, increasing the company’s attractiveness ahead of the listing in the capital markets as part of its shares or a bundle of its downstream subsidiaries,” S&P said.

The kingdom plans to float less than 5 per cent of Saudi Aramco on Saudi bourse and another yet undecided international stock market. Aramco’s initial public offering, slated to be the biggest ever global share sale is the centre piece of the Riyadh’s efforts to diversify its hydrocarbons-dependent economy.

Reports suggest that Aramco could be valued at $1 trillion-$2 trillion, about 150 per cent to -300 per cent of Saudi GDP, which will make 5 per cent stake worth about 7 per cent to 15 per cent of GDP. “As these plans are still in formation, and the ultimate use of the funds generated is unclear, we have not factored proceeds from a potential IPO into our projections,” S&P added.

Saudi Arabia, which relies more than 80 per cent on proceeds from sale of crude for revenues has tapped the domestic and international debt markets and set the emerging markets bond sale record last year when it raised more than $17bn through debut foray into fixed income market.