Saudi Arabia’s Economic Reforms Boost Credit Rating to A+ Amid Oil Challenges

Saudi Arabia has received a ratings boost from global ratings agency S&P, with its long-term sovereign credit being lifted from "A" up a notch to "A+", reflecting substantial progress in the kingdom's social and economic reforms. Backed by Vision 2030, this rating shift highlights improvements in the country’s governance and assertive steps to strengthen domestic capital markets.

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According to Zahabia Gupta, Director and Lead Analyst for the Middle East and Central Asia at S&P, the upgrade speaks volumes about the kingdom's growing institutional transparency and efficiency. She explained, "We believe that institutional checks and balances have become more visible as Vision 2030 progresses, as reflected by the recalibration of project priorities and timelines."

But it's not all sunshine and roses—there are a couple of hurdles on the horizon. Saudi Arabia's economy remains sensitive to shifts in oil prices. Gupta pointed out that the ratings firm expects oil prices to decline over the next few years, settling around $70 a barrel from 2025 onwards, down from an average of $81 per barrel we've seen recently. She also noted that Saudi Aramco's plans to slash dividends significantly by roughly a third in 2025 would further impact oil revenue.

These factors combined will likely see the kingdom's fiscal deficit broaden from 2.8 percent of GDP in 2024 to approximately 4.8 percent this year. Still, despite these challenges, there's reason for optimism. The non-oil elements of the Saudi economy continue to show robust momentum, and higher oil production quotas from OPEC Plus should boost Saudi oil output to over 10 million barrels per day in the coming years. Even though that's below the full 12 million barrels per day the kingdom could theoretically produce, it's a positive sign moving forward.

Interestingly, although Saudi Aramco paused its drive to significantly ramp up its maximum sustainable output, investment and development aren't taking a complete backseat. Projects in the major Dammam, Berri, Marjan, and Zuluf oil fields continue apace, alongside advances in unconventional gas through the notable Jafurah shale field.

Proceeds from the oil sector, including special dividends and public offerings, also keep feeding into Vision 2030 initiatives. One such offering – a secondary listing of Saudi Aramco shares – successfully raised an impressive $12.4 billion last June, following substantial stake transfers to the powerful Public Investment Fund (PIF) and its subsidiaries.

As we look ahead, and as our mates at Arageek will probably tell you, achieving balanced economic diversification remains the crucial challenge for Saudi Arabia. But for now, the upgraded "A+" rating certainly marks an important milestone along its economic journey.