Fitch revises Saudi outlook to negative on weakening balance sheets

FITCH RATINGS - DUBAI. Ratings agency Fitch on Monday revised its outlook on Saudi Arabia to negative from stable, citing weakening fiscal and external balance sheets, but maintained its core 'A' rating.

The world's top oil exporter, whose finances have been hurt by the coronavirus pandemic and lower crude prices, could see its budget deficit widen to 12.8% of GDP this year from 4.5% in 2019, reflecting a 33% drop in oil revenue, a 5% decline in non-oil revenue, and a 1% increase in spending compared to last year, said the agency.

Net foreign assets are expected to decline to 60% of GDP by 2022 from about 72% in 2019-2020, due to debt issuance and reserve drawdowns, Fitch said.

The Saudi ministry of finance in a statement said that despite the negative outlook, the country's ratings "have demonstrated notable resilience with three consecutive rating affirmations by the three major credit rating agencies since the onset of the crisis in March 2020."

It added it remained strongly committed to medium-term consolidation and fiscal sustainability.

Saudi Arabia in July tripled a value-added tax to 15% to boost state coffers and offset the decline in oil revenue, a move which economists said could dampen economic recovery.

Fitch expects the Saudi economy to contract by a little over 4% this year because of cuts in oil production and lower activity due to the coronavirus crisis.

The increased taxation, combined with the expiration of coronavirus-related spending and recovery in the non-oil economy, will contribute to narrower deficits in the next two years, said the agency.

It expects fiscal deficits to narrow gradually to about 8% of GDP next year and 5% of GDP in 2022, based on a forecast recovery of Brent oil prices to an average of $50 per barrel by 2022, and growth in Saudi crude oil production to 9.7 million barrels per day by 2022, as cuts under an OPEC+ agreement are tapered.

In a preliminary budget statement in September, Riyadh forecast its budget deficit would narrow to 0.4% in 2023, with deeper spending cuts planned over the next few years.

"We expect that macroeconomic and social realities will lead to a departure from these targets," Fitch said.

"The government is also likely to face pressure to maintain spending to support the recovery and the welfare of Saudi citizens, potentially offsetting the gains from higher VAT.