Fitch rating for Saudi Arabia hints at risks

The Fitch ratings agency has released a report for the government of Saudi Arabia that, to the layperson, might look a bit ominous.

Fitch has affirmed the country's rating at AA- with a negative outlook in the report, in which Fitch analysts paint a complicated picture of the government's balance sheet.

“(Saudi Arabia’s) balance sheet remains an important support for the ratings, although it has continued to weaken as a result of lower international oil prices,” analysts wrote. “We expect the balance sheet to weaken further as the general government deficit, while shrinking from the peak of 13.8 percent of GDP in 2015, is forecast to remain high in 2016 and 2017."

Analysts also cited a fiscal tightening that would be so severe that in Fitch's view the fiscal objectives will probably have to be scaled down.

In addition, the broad range of other social and economic objectives and the complexity of implementation may overwhelm the administrative capacity of the government, analysts wrote.

Also in the Fitch report is a $10 billion loan that the Saudi government took out in May, along with warnings about a rapidly changing labor market.

“Given the high share of young people in the population, the labor force is growing rapidly and the economy will struggle to absorb this growth, " the report said. "This, and the fiscal consolidation measures, may lead to rising disaffection, but widespread domestic unrest is unlikely. While the line of succession has been clearly defined, tensions within the royal family could still be a cause for instability. While income per capita measures are high, other structural indicators, such the World Bank indicators for governance and the business climate are both well below the medians for both AA- and A-rated peers.”

So how bad is this, and what is the general risk that investors are taking in Saudi debt?

“It's still a decent rating,” Ken Smith, associate professor and department chair of economics at Millersville University, told the Gulf News Journal. “It's hardly junk.”

Smith said ratings information and other indicators reflect the problems that Saudi Arabia and other GCC countries have been having over tumbling oil prices.

“They've been losing a lot of their currency reserves,” Smith said. “There may be fear that they will be unable to pay back their loans — there is a risk of default, but it's moderate.”

As for the labor market, Smith said much of the Middle East has a significant problem with youth unemployment, which can be politically destabilizing.

“It's pretty capital-intensive,” Smith said of the traditional oil industry that has employed so many Saudis, explaining that diversification in the labor market helps provide other easier avenues toward lower unemployment.

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