This comes at a time when the “Fitch Ratings” credit rating agency expects the Kingdom’s economy to shrink by just over 4% this year; As a result of oil production cuts, and a decline in activity due to the Coronavirus crisis.
Yesterday, Monday, Fitch revised the outlook for Saudi Arabia to negative, attributing this to the weak financial conditions and the Kingdom’s external balance. But it kept the rating at “A”.
The agency said that the Kingdom may witness an increase in the budget deficit to 12.8% of GDP this year compared to 4.5% in 2019, which reflects a 33% decline in oil revenues and a 5% decrease in non-oil revenues, compared to a 1% increase in spending. Compared to last year.
Saudi Arabia is the largest exporter of oil in the world, and its financial conditions have been affected by the Corona virus pandemic, and the decline in crude prices.
Decline in foreign assets
Fitch added that net foreign assets are expected to decline to 60% of GDP by 2022, compared to 72% in 2019-2020, due to debt issuance and reserves withdrawals.
The Saudi Finance Ministry said in a statement that despite the negative outlook, the kingdom’s ratings “show remarkable robustness with 3 consecutive confirmations of the rating from the three major credit rating agencies since the start of the crisis in March 2020.” She added that she would remain firmly committed to enhancing the medium term and financial sustainability.
Value-added tax and fiscal deficit
Last July, Saudi Arabia tripled the value-added tax to 15% to support state coffers and compensate for declining oil revenues, a move economists said could dampen the economic recovery.
But the agency said that the tax increase – with the end of pandemic-related spending and the recovery of the non-oil economy – would contribute to reducing the deficit over the next two years.
Fitch expects the fiscal deficit to gradually decrease to about 8% of GDP next year, and 5% of GDP in 2022, based on an expectation that Brent crude prices will recover to $ 50 a barrel on average by 2022, and Saudi crude oil production will grow to 9.7 million barrels per day by 2022, with decreasing cuts required by the OPEC Plus agreement.
In a preliminary budget statement in Parliament last September, Riyadh expected its budget deficit to drop to 0.4% in 2023, with larger spending cuts planned over the next few years.
But Fitch said, “We expect that the macroeconomic and social realities will deviate from those goals,” adding, “The government will also likely face pressure to maintain spending to support the recovery and prosperity of Saudi citizens, which may offset the gains from the VAT increase.”