Sama’s reserves seen at $700bn

The Saudi central bank’s international reserves are expected to jump by $132 billion or 23 per cent to $700 billion (2,625 billion riyals) by the end of 2013 as compared to $568bn in 2011, Fitch Ratings said.

Government deposits at the Saudi Arabian Monetary Agency (Sama), the central bank, rose by $52bn, or 9 per cent of GDP in 2011. However, the value of future spending commitments also continues to rise.

Oil prices are forecast to average at least $40/b above the level needed to balance the budget in 2012, and the high share of capital spending affords extra fiscal flexibility.

"Soaring oil revenues are enabling Saudi Arabia to invest and reform to address structural challenges while continuing to build up savings," says Charles Seville, Director in Fitch's Sovereign team.

The general government recorded an increased surplus of 14 per cent of GDP in 2011, as growth in oil revenues outweighed the impact of a 25 per cent rise in spending. Fitch forecasts a general government fiscal surplus of at least 12 per cent of GDP in 2012. The government will continue to pay down public debt, although the recent government-guaranteed sukuk issue could be followed by more to finance cash-generative projects.

Fitch expects the economy to grow by 4 per cent in 2012, with risks to the upside as oil production may more than match 2011 levels. Inflation is 5 per cent and rising but the economy is far from overheating, with credit growth under control. Real GDP growth rebounded to 6.8 per cent in 2011, the highest since 2003, driven by a boost to oil output and fiscal stimulus.

A fall in oil prices represents the main risk to Saudi Arabia's economy and public finances, but the government could use its growing deposits to cushion adjustment or deliver a counter-cyclical boost. The breakeven price in 2012 is around $70/b, brought down by rising production. Over the medium term, rising spending and growing domestic oil use may boost the breakeven oil price and erode the surplus position.

Governance indicators are not as strong as 'AA' rated peers, but mitigated by the government's ample resources. Investments in job creation, education and housing are designed to secure social stability among a young and fast-growing population, against a backdrop of political changes elsewhere in the region.

Ongoing convergence of structural factors including per capita income, and progress in economic diversification and job creation, leading to lower unemployment, would be positive for the ratings. Improved data on the labour market and general government finances, including the wider public sector, would also be positive. Strengthening in the sovereign balance sheet, over the medium term, would further improve resistance to shocks.

Geopolitical risk, in view of escalation in tensions between Iran and the international community, could trigger negative rating action. A domestic political shock could also pressure the rating. However, the rating already incorporates a degree of political risk and therefore has some tolerance for adverse developments.

A steep and prolonged downward oil price shock would force the government to draw on deposits, or increase borrowing, weakening its balance sheet and putting downward pressure on the rating. Such an outcome could also increase social pressures.

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