Riyadh – Mubasher: Moody's Investors Service said that Saudi Arabia's credit strengths have a robust albeit deteriorating government balance sheet, driven by still-moderate debt levels and substantial fiscal and foreign currency buffers.

The sovereign credit profile was further underpinned by the kingdom's very large proved hydrocarbon reserves with low extraction costs and prudent financial system regulation, according to the rating agency's annual report issued on Tuesday.

"The Saudi government has made some initial progress in its ambitious and comprehensive reform plans to diversify fiscal revenue streams and the economy away from hydrocarbons. However, their full implementation will be challenging and their positive impact will only be felt over the longer term,” said a Moody's vice president - senior analyst, Alexander Perjessy. 

The government balance sheet is projected to continue to weaken over the next few years whereas the economy is expected to grow at an average rate of around 3% between 2021 and 2024. 

Saudi Arabia's credit challenges include its economic and fiscal exposures to contractions in global oil demand and prices, coupled with socioeconomic challenges due to the rapid population growth and elevated unemployment, as well as a geopolitical risk, driven by regional security tensions with Iran.

Moody's said: "The negative outlook reflects increased risks to fiscal strength stemming from the shock to global oil demand and prices triggered by the coronavirus pandemic and uncertainty regarding the degree to which the government will be able to offset its oil revenue losses and stabilise its debt burden and assets in the medium-term."

Given that the government is capable to contain the deterioration in its balance sheet and stabilise and ultimately reverse the debt trajectory, the outlook could be stabilised.

The increasing likelihood of a materially larger fiscal deterioration would likely put downward pressure on the rating, the report added.