MENA Country Report - Saudi Arabia

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02 7 2015

Saudi Arabia’s GDP growth is expected to slow down to 3.0% in 2015 following a growth of 3.6% in 2014.

Middle East and North Africa economies

Atradius STAR Political Risk Rating*:

Algeria: 6 (Moderate-High Risk) - Positive

Egypt: 6 (Moderate-High Risk) - Negative

Jordan: 5 (Moderate Risk) - Negative

Kuwait: 3 (Moderate-Low Risk) - Stable

Morocco: 5 (Moderate Risk) - Positive

Saudi Arabia: 3 (Moderate-Low Risk) - Negative

Tunisia: 5 (Moderate Risk) - Negative

United Arab Emirates: 3 (Moderate-Low Risk) - Positive

 

* The STAR rating runs on a scale from 1 to 10, where 1 represents the lowest risk and 10 the highest risk.

The 10 rating steps are aggregated into five broad categories to facilitate their interpretation in terms of credit quality. Starting from the most benign part of the quality spectrum, these categories range from ‘Low Risk’, ‘Moderate-Low Risk’, ‘Moderate Risk’, ‘Moderate-High Risk’ to ‘High Risk’, with a separate grade reserved for ‘Very High Risk.’

In addition to the 10-point scale, rating modifiers are associated with each scale step: ‘Positive’, ‘Stable’, and ‘Negative’. These rating modifiers allow further granularity and differentiate more finely between countries in terms of risk.

 

For further information about the Atradius STAR rating, please click here.

 

Saudi Arabia

Political situation

Head of state/government: King and Prime Minister Salman bin Abdulaziz Al Saud (since January 2015)

Form of government: Monarchy

Population: 27.3 million (est.) - immigrants make up more than 30% of the total population.

A more assertive foreign policy

The on-going political turmoil in the Middle East is a challenge for the Saudi rulers, with major security problems due to the current situation in neighbouring Iraq and Yemen. Saudi Arabia feels increasingly challenged by growing Iranian influence, its traditional rival for hegemony in the Gulf region. At the same time, Riyadh increasingly perceives the US policy in the Middle East as too reluctant and too focused on a rapprochement with Iran (recent closure of a deal over Teheran‘s nuclear programme).

 

Therefore, Saudi foreign policy has turned to become more assertive, mainly in order to counter Iranian influence, e.g. by supporting oppositional (Sunni) forces in Syria and, since March 2015, by a direct military intervention in Yemen against the advancing Houthi rebels, which as a Shia tribe is allegedly backed by Iran.

 

Domestically, the crown succession issue went smoothly, with Salman bin Abdulaziz Al Saud following his half-brother Abdullah on the throne in January 2015, after the latter passed away in December 2014. Any further political and social reforms are expected to remain cosmetic, as the ruling Saud family and the clerical establishment will remain in firm control.

 

Economic situation

A high fiscal deficit in 2015

Saudi Arabia has an oil-dependent economy with strong government controls over all major economic activities. Economic growth will be negatively affected by decreased oil prices, and GDP growth is expected to slow down to 3.0% in 2015 following growth of 3.6% in 2014.

 

Given that oil accounts for 93% of government revenues, it comes as no surprise that the decline in the price of oil will have a large negative impact on public finances. Since 2011 the government has increased its spending on public salaries, social services and investments, mainly in order to prevent the emergence of political opposition and social unrest. As a result, the fiscal break-even oil price to meet spending commitments has risen to almost USD 100 per barrel in 2014 (while in mid-2015 the oil price was down to USD 65 per barrel).

 

Nevertheless, the government passed another expansionary budget for 2015, with spending remaining at a high level. While this will strongly support non-oil related economic activities, it is expected to lead to a budget deficit of 14.3% of GDP in 2015 (after a 1.2% surplus in 2014). At the same time, the current account deficit is forecast to turn from high surpluses in previous years to deficit in 2015.

 

That said, due to its very large international reserves of more than USD 700 billion, Saudi Arabia is able to easily fund those deficits. Import cover amounts to almost five years in 2015. Due to this and a low public debt of 2% of GDP, Saudi Arabia is even able to sustain high spending for some years. However, a structural shift to a long-term period of lower oil prices would at last pose a risk for the economy.

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