What does Saudi Arabia's credit upgrade signal?

The Kingdom of Saudi Arabia's flag

Standard & Poor's upgraded Saudi Arabia's credit rating to “A+” from “A”, with a “Stable” outlook. The three global rating agencies (Moody's, Standard & Poor's and Fitch) have reiterated the creditworthiness of the Kingdom's sovereign debt.

Moody's earlier assigned the Kingdom an “Aa3” rating, while S&P and Fitch rated “A+”, which reflects the improved confidence in the Saudi economy, especially in light of the success of the Kingdom's strategy to diversify sources of income and enhance fiscal sustainability.

Saudi Arabia's rating is on par with China and Japan, according to Standard & Poor's, with France and the UK according to Moody's, and ahead of several G20 countries such as India, Brazil, Indonesia, Mexico, South Africa, Turkey and Argentina.

A higher credit rating is especially important for determining the interest an issuer must pay, as the higher the rating, the lower the interest rate, and vice versa.

Furthermore, the importance of a higher credit rating also lies in the number of investors who wish to buy a particular debt issue, given that several financial institutions and investment funds only invest in debt instruments with high creditworthiness. Therefore, a lower rating for a particular issue necessarily means less demand for it and difficulty in covering it, due to the reluctance of these funds and financial institutions to buy.

Rating agencies use symbols to describe creditworthiness, starting from AAA as the highest credit rating, and gradually moving through to lower ratings such as AA, A, BBB, and so on, as the following table shows:

A number of experts told Argaam that the upgrade of the Kingdom's credit rating reflects the growing confidence in the Saudi economy, stressing that the move will help boost foreign investment inflows and reduce the cost of government and private financing. 

The upgrade is due to ongoing economic reforms, the development of the local debt market and tangible progress in diversifying sources of income away from oil, they added..

Factors behind Saudi Arabia's rating upgrade by S&P

Ihsan Buhleika, founder of Jawatha Consulting Center

Ihsan Buhleika, founder of Jawatha Consulting Center, said that the Kingdom's credit rating upgrade by international credit rating agencies reflects the growing confidence in the national economy, noting that this upgrade further strengthens the Kingdom's efforts to transform into a diversified economy that does not rely solely on oil.

The factors that boosted the Kingdom's credit rating include a stable exchange rate, low inflation, and ongoing economic reforms. These factors raise the Kingdom's creditworthiness even in the face of global geopolitical challenges., he added.

Mohammed Makni, professor of finance and investment at Imam Mohammad Ibn Saud Islamic University

For his part, Mohammed Makni, professor of finance and investment at Imam Mohammad Ibn Saud Islamic University, said that the credit rating of countries is a key indicator that reflects its financial viability and is a testimony to its ability to meet its obligations, as well as reflecting the quality of financial and economic performance, thus giving investors a more positive perception.

The Kingdom's rating has witnessed remarkable progress in recent years, which reflects the major transformations in its economy, especially with the continued sustainable growth in the non-oil sectors, which drove Standard & Poor's to upgrade the Kingdom's rating to “A+” with a Stable outlook, Makni continued.

Amr Abdo, a capital markets economist

Amr Abdo, a capital markets economist, said that the upgrade of the Kingdom's credit rating comes as a result of its progress in diversifying the economy under Vision 2030, as well as institutional reforms, and its ability to withstand the transformation in the energy sector. He added that a vote of confidence raises investors' willingness to include the Kingdom in their investment plans, especially in light of the increased uncertainty towards countries and markets that were of high confidence in the past.

S&P hailed the growth of non-oil sectors and youth-driven productivity, but warned of the risks of oil price fluctuations and the potential increase in public spending, Abdo noted.

Impact of Rating Upgrade on Saudi Economy and Diversifying Sources of Income Buhleika indicated that the high credit rating helps reduce the cost of borrowing, as lower risks make investors more willing to offer financing at lower returns, which boosts the Kingdom's ability to finance its development projects more efficiently.

He highlighted the strong demand for Saudi debt instruments in international markets, where offerings are oversubscribed, thus reflecting the growing confidence in the strength of the Saudi economy.

As for the impact of this upgrade on investments, Buhleika pointed out that the higher rating makes the Kingdom more attractive to international investors, thus spurring capital inflows and supporting sustainable economic growth plans.

The impact of the rating upgrade will extend positively to the Saudi Exchange (Tadawul), especially for government-linked companies such as Aramco, SABIC and Saudi Electricity. The improvement in the country's rating contributes to raising the rating of these companies, giving them more opportunities to secure loans if needed, and thus increasing investor confidence in these companies, Makni said.

Deepening Local Capital Market

The improvement of the Kingdom's sovereign rating to the green zone, i.e. “BBB-/Baa3”, sends a message to investors that investing in sovereign securities has low risk, which reflects positively not only on the country's external public debt issuances, but also on its domestic issuances, its capital market and its attractiveness to foreign direct investment, Buhleika added.

“The steady improvement of the Kingdom's credit rating has contributed, along with other factors, to increasing the momentum of FDI inflows, whether directed to Tadawul, private equity investment, funds, or even direct investment by establishing projects,” he said. This is due to the low risk of default at maturity, as the country's credit rating is one of the main determinants that investors rely on when making their investment decisions.

Buhleika also pointed out that the outlook of the rating agencies plays a major role in investors' decisions, which in the case of the Kingdom range from "Positive" by Fitch to "Stable" by Moody's and Standard & Poor's.

The high rating reflects the Kingdom's financial and political stability and strengthens its reputation internationally, making it more attractive for investments and trade and helping it secure soft loans on better terms from international financial institutions. It also boosts companies' confidence in the economy, thus motivating local economic activities, Makni added.

He expected that the Kingdom will witness more rating upgrades in the coming years as a result of the sustainable efforts under Vision 2030, noting that the Kingdom today tops a number of G20 countries in credit rating, which confirms the success and quality of developing and diversifying the Saudi economy.

For his part, Abdo said that capital deepening is a key pillar in the infrastructure of a diversified financial system with sufficient capacity to contain the liquidity resulting from the strength and vitality of the economy.