Saudi Arabia has potential for ratings upgrade, says Fitch

Saudi Arabia has the potential for a ratings upgrade during the next 18 months, a senior executive at Fitch told Al Arabiya.

The nation is currently rated ‘AA-’, but further labor-market reforms and diversification of the economy could prompt an upgrade, the credit-ratings agency said.

There is “some potential” for such a move over the next 18 months, said Tony Stringer, the Managing Director and Chief Operating Officer of Global Sovereigns and Supranationals at Fitch Ratings.

Credit ratings are used by investors to assess the risk of a particular market, and a better rating can lead to stronger economic growth.

Fitch last week affirmed Saudi Arabia’s rating at ‘AA-’, saying there was a positive outlook due to factors such as double-digit current account surpluses. The agency said in March that the country could see an upgrade, a point reaffirmed by Stringer.

Stringer was talking to Carina Kamel, Al Arabiya TV’s Senior Correspondent and Presenter based in London.

Q&A with Tony Stringer, the Managing Director and Chief Operating Officer of Global Sovereigns and Supranationals at Fitch Ratings

Q. How likely is an upgrade of Saudi Arabia’s ratings in the next 6-12 months?

As you said the positive outlook very much reflected the progress that we’ve seen from the Saudi authorities, particularly on specifics of labor-market reform continuing to diversify the economy away from dependence on oil. And we see that as a sort of ongoing trend. At this point in time, we still think it needs further progress to be made before that would crystallize into an upgrade of the rating. But clearly our outlook horizon tends to be about 18 months to two years, typically. So during that period of time, if you go back to March, you can see that there is some potential for an upgrade in the rating over that time horizon.


Q. What more needs to be achieved for an upgrade to be considered, especially on labor-market reforms and the banking sector?

On the banking sector, I don’t think too much more does need to be achieved, because we think it’s a relative strength for the credit. We don’t really see any near-term threats or vulnerabilities in the banking sector. On the labor-market reforms, as I mentioned, progress has been made. In the first seven months of this year, employment of Saudi nationals in the private sector increased by 21 percent, the level of Saudi national labor-market participation is increasing, including female participation. So these are all positive things. Growth in the economy in the non-oil sector is outpacing growth in the oil sector: 4.5 percent year-to-date, and looking to continue increasing over the next couple of years. So all those things are positive, and really we just want to see a continuation of those trends to crystallize any further positive ratings.


Q. To what extent do you see low oil prices as a risk factor to the Saudi economy?

It is difficult to envisage a scenario whereby oil prices would be significantly lower that they are at the moment for an extended period of time. I think we’d be talking a good number of months for that to create any kind of a problem. And the decline in the oil price would have to be pretty significant from current levels. Clearly the current geopolitical situation, if anything, might suggest that there could be some sort of upward pressure on prices in the near term. Although our own forecasts are that the oil price will remain in the range of $100 to $105 a barrel over the next two to three years, on an average basis; clearly there will be fluctuations during short term. So we think that is a relatively remote risk. But given the still high dependence of the country on the oil sector, clearly it is a risk that we have to factor into our analysis.

Q. To what extent do you see the current geopolitical risks in the Middle East having an impact on the Saudi economy and its sovereign credit rating?

It is always difficult to speculate about things like armed conflicts. But we have said as part of our recent research on Saudi that clearly that would be a potential negative impact on the rating. If there was a significant geopolitical military escalation in the region that had spillover effects into the Saudi economy - it’s certainly not our central case, it’s not something that we are expecting to happen – but obviously given heightened tensions in parts of the region including Syria, it is something that we have to take into consideration. But it’s certainly not our base case.

Q. What impact on the economy and your assessment of the ratings would there be if Saudi Arabia opened up its stock markets to foreign investment?

I think that would be kind of a symptom of an ongoing policy direction of opening the economy. In itself, I don’t think it would have any impact on our rating or our outlook. But it would be potentially another positive signal that Saudi is open for business and that it’s looking to attract inflows of capital and increase its level of interaction with other financial markets.