Saudi Arabia. Summary
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- Gervais Atkinson
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1 Saudi Arabia Summary Moody s A1 / S&P A- / Fitch AA- 1 Economy: Agriculture 3%, Industry 43%, Services 54% Saudi Arabia is a major global oil producer and one of the world s 20 largest economies. The country has abundant natural resources, including the second-largest proven oil reserves, amounting to 17.8% of the world s total. Its fiscal and external balances are solid despite the recent deterioration caused by oil price decline from Saudi Arabia was able to save during periods of high oil prices while limiting both domestic and external borrowing, which helped position it to withstand the sharp drop in oil prices. The recent rebound in oil prices has helped improve economic fundamentals despite a reduction of oil output as part of the OPEC agreement. Economic Indicators F 2018F Population (Millions) GDP per Capita (USD) 24,890 24,578 21,092 20,362 21,278 22,411 Nominal GDP (USD Billions) Real GDP (%) Year-End CPI (%) Fiscal Balance (% of GDP) Interest (% of Revenues) FC Debt/Public Debt (%) Government Debt (% of GDP) Government Debt (% of Revenue) Current Account (% of GDP) FDI (% of GDP) External Debt (% of GDP) Foreign Reserves/External Debt (%) Foreign Reserves (Mo. of imports) Foreign Reserves (% of GDP) As of November 2017 Forecasted or estimated results do not represent a promise or guarantee of future results and are subject to change. Source: Lazard, Citibank, Haver Analytics, IMF 533
2 Lazard Emerging Markets Debt Rating History Following is a history of the country s foreign and local currency ratings by the major agencies dating back to 2000 demonstrating the country s more recent deterioration in fundamentals. We have also included the spread history for the country s hard currency external debt against the JP Morgan Emerging Markets Bond Index Global Diversified. Rating History Hard Currency Local Currency AA+ AA AA AA- AA- A+ A A+ A- A BBB+ A- BBB BBB BBB- BB Moody's S&P Fitch Moody's S&P Fitch As of December 2017 Performance represents past performance. Past performance is not a reliable indicator of future results. Source: Bloomberg, Fitch, Moody s, Standard and Poor s 534
3 Saudi Arabia Strengths Energy and Petrochemical Resources Saudi Arabia is rich in natural resources, especially energy. The country has the second-largest proven oil reserves in the world, amounting to 17.8% of global reserves. It is the world s largest oil producer, accounting for 13.9% of total global production, and the largest exporter, accounting for 16.9% of the global oil exports. Saudi Arabia s oil reserves of billion barrels would last approximately 70 years at current production levels, while proven gas reserves total trillion standard cubic feet as of December Saudi Arabia has taken advantage of its low oil extraction costs to develop the petrochemical industry, which now accounts for 15.2% of total exports and 58.9% of non-oil exports. The largest petrochemical player is Saudi Basic Industries Corporate ( SABIC ) which is 70% owned by the government and operates as the world s fourth-largest chemical company. Strong External Position The country s external position is very solid despite the deterioration in The country s capacity to pay its external debt remains strong, as reflected by the country s net international position of close to 82.5% in June The current account shifted back to a surplus of 1.1% of GDP in the second quarter of 2017 from a deficit as high as 10.2% of GDP in the first quarter of The improvement mainly reflects an increase in oil prices and sluggish import growth from weak domestic demand. The improvement of the current account has substantially reduced fears that Saudi Arabia would be forced to allow its exchange rate which has been pegged to the US dollar since 1986 to depreciate. Solid Balance Sheet Saudi Arabia s fiscal position improved substantially in 2017 and likely to improve further in The fiscal deficit was an estimated 8% of GDP down from 13% in The improvement came from higher oil prices and lower expenditures. The government has adopted some important measures to reduce the deficit. These positive indications of the government s fiscal commitment include reducing subsidies, canceling bonuses, and cutting minister salaries. Although, some measures were reversed in 2017, the IMF expects the deficit to fall below 5% in 2019 and to be near balance by The government has more ambitious fiscal forecasts and hopes to acheive a fiscal balance by The debt to GDP ratio remains low at below 20%, and it is expected to peak at 25% in Weaknesses Oil Dependency Saudi Arabia is highly dependent on oil prices, making economic performance volatile. Oil amounts to about one-fourth of nominal GDP and close to three-quarters of government revenues and exports. As a result, the economy tends to perform well when oil prices are high and tends to perform poorly when oil prices are lower. During the period, real GDP grew 6.1% annually while the country posted fiscal surpluses averaging 10% of GDP and current account surpluses of 21%. In contrast, during , the economy grew 3.2% annually and Saudi Arabia reported a fiscal deficit above 10% of GDP. The government is working to diversify its economy as part of the National Transformation Programme and Vision 2030, although progress is likely to be limited, and execution will be challenging. 535
4 Lazard Emerging Markets Debt Geopolitical Risks On the geopolitical front, Saudi Arabia plays a very important role in the region, although it remains vulnerable to conflicts, such as the tension with Iran and the conflict with Yemen. Over the past several decades, tension between Saudi Arabia and Iran has remained high, and the two countries have supported opposite sides in armed conflicts, such as the recent conflict in Syria. Tensions ran especially high when Saudi Arabia recalled its ambassador to Iran in June Meanwhile, until recently, Saudi Arabia was involved in an armed conflict against Al-Houthi rebels in Yemen, although a ceasefire was declared in April In 2017 tensions rose with Qatar as Saudi Arabia and its Arab allies adopted a series of economic sanctions against Qatar and cut diplomatic ties due to opposing views on key geopolitical issues such as support to Iran and Islamic groups. Thus far, the sanctions have had limited indirect impact on Saudi Arabia s economy. Royal Succession Saudi Arabia s royal succession plan was defined in 2015, but risk of tension within the royal family persists. King Salman, who ascended the throne in January 2015, quickly nominated his allies and son, Mohammad bin Salman, to key positions. King Salman s successor is Mohammad bin Nayef, although he named his son deputy crown prince. Mohammad bin Salman has quickly expanded his power and was appointed minister of defense. Shortly thereafter, he was closely involved in the conflict with Yemen. He also serves as chairman of the Council for Economic and Development Affairs and controls Aramco, the national oil company. At the same time, King Salman is limiting the influence of key members of the ruling al Saud family, which could eventually spark political tension. In November 2017, the government arrested political and business leaders on the grounds of corruption, which some view as a consolidation of power of Mohammad bin Salman. 3 King Salman is expected to abdicate soon and nominate his son the new king. 536
5 Saudi Arabia Country Background Size 21, KM 2 (14 th ) Capital Population Riyadh 28.6 Million Religion Muslim 90.0%, Other 10.0% Median Age 27.5 Years Literacy Rate 94.7% Independence 23 September 1932 Political System Government Leadership Next Election -- Legislative Branch Abosolute Monarchy King/Prime Minister Salman bin Abd al-aziz Al Saud Unicameral Consultative Council Economy Agriculture 2.7%, Industry 43.4%, Services 54.0% Labor Force Agriculture 6.7%, Industry 21.4%, Services 71.9% Merchandise Exports Export Partners Currency As of November 2017 Source: CIA Petroleum and Petroleum Products China 13.6%, Japan 11.3%, India 10.7%, United States 9.8%, South Korea 9.1%, Singapore 4.7% Saudi Riyals (SAR) 537
6 Lazard Emerging Markets Debt Country Timeline 1932 The areas controlled by Abd-al-Aziz are unified under the name Kingdom of Saudi Arabia and Abd-al-Aziz is proclaimed King 1938 Oil is discovered and production begins under the US-controlled Aramco (Arabian American Oil Company) Saudi Arabia is a founding member of OPEC (Organisation of Petroleum Exporting Countries) Saudi Arabia condemns Iraq's invasion of Kuwait and asks the US to intervene; it allows foreign troops, the Kuwaiti government and many of its citizens to stay in Saudi Arabia but expels citizens of Yemen and Jordan because of their governments' support of Iraq US says it will pull out almost all its troops from Saudi Arabia, ending a military presence dating back to the 1991 Gulf war. Both countries stress that they will remain allies World Trade Organization gives the green light to Saudi Arabia's membership following 12 years of talks Saudi troops move to enforce buffer zone in northern Yemen after becoming involved in border clashes with Yemeni rebels King Abdullah announces increased welfare spending, as unrest continues across Arab world Crown Prince Nayef dies, succeeded by more liberal defense minister, the 76-year-old Prince Salman King Salman ascends throne after King Abdullah dies 2017 Houthi rebels in Yemen carry out rocket attacks into Saudi Arabia as Saudi-led coalition increases bombing of rebel-held territory in Yemen. Saudi Arabia sparks a diplomatic crisis by leading an air, land and sea blockade by Arab countries, in an attempt to get Qatar to cut its alleged connections with terrorism and distance itself from Iran. King Salman names his son Mohammed bin Salman first in line to the throne. Purge of the kingdom's political and business leadership in an apparent move by the heir to the throne to consolidate his hold on power. Source: BBC Notes 1 As of December The Kingdom of Saudi Arabia Prospectus 22 September
7 Important Information Published on 26 February Information and opinions presented have been obtained or derived from sources believed by Lazard to be reliable. Lazard makes no representation as to their accuracy or completeness. All opinions expressed herein are as of 24 February 2017 and are subject to change. Forecasted or estimated results do not represent a promise or guarantee of future results and are subject to change. Specific to the political, religious and military unrest in Iraq, and as described in this paper, there exists a heightened risk of ongoing armed conflict and subsequent economic, political and social repercussions to all parties involved. Specific to the political and military unrest in Ukraine and Russia, and as described in this paper, there exists a heightened risk of ongoing armed conflict and subsequent economic, political and social repercussions to all parties involved. An investment in bonds carries risk. If interest rates rise, bond prices usually decline. The longer a bond s maturity, the greater the impact a change in interest rates can have on its price. If you do not hold a bond until maturity, you may experience a gain or loss when you sell. Bonds also carry the risk of default, which is the risk that the issuer is unable to make further income and principal payments. Other risks, including inflation risk, call risk, and prepayment risk, also apply. High yield securities (also referred to as junk bonds ) inherently have a higher degree of market risk, default risk, and credit risk. Securities in certain non-domestic countries may be less liquid, more volatile, and less subject to governmental supervision than in one s home market. The values of these securities may be affected by changes in currency rates, application of a country s specific tax laws, changes in government administration, and economic and monetary policy. Emerging markets securities carry special risks, such as less developed or less efficient trading markets, a lack of company information, and differing auditing and legal standards. The securities markets of emerging markets countries can be extremely volatile; performance can also be influenced by political, social, and economic factors affecting companies in these countries. This document is provided by Lazard Asset Management LLC or its affiliates ( Lazard ) for informational purposes only. Nothing herein constitutes investment advice or a recommendation relating to any security, commodity, derivative, investment management service or investment product. Investments in securities, derivatives and commodities involve risk, will fluctuate in price, and may result in losses. Certain assets held in Lazard s investment portfolios, in particular alternative investment portfolios, can involve high degrees of risk and volatility when compared to other assets. 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