Fitch Ratings - London: Fitch Ratings has affirmed Saudi Arabia's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'A+' with a Stable Outlook.

A full list of rating actions is at the end of this rating action commentary.

Key Rating Drivers

Balance Sheet Strength: Saudi Arabia's ratings reflect its strong fiscal and external balance sheets, with government debt/GDP and sovereign net foreign assets (SNFA) considerably stronger than both the 'A' and 'AA' medians, and significant fiscal buffers in the form of deposits and other public sector assets. Oil dependence, low World Bank governance indicators and vulnerability to geopolitical shocks have improved but remain relative weaknesses. Deep and broad social and economic reforms implemented under Vision 2030 are diversifying economic activity, albeit backed by large public spending.

Robust External Finances: Reserve coverage of current external payments was 14.4 months in 2024 ('A' median 1.9 months) and SNFA 63.7% of GDP ('A' median 8.7%). Gross FX reserves increased in 2024 amid a small current account surplus (estimated by Fitch at 0.2% of GDP) and strong net inflows through the financial account. Fitch expects current account deficits in 2025 and 2026 (averaging 2.4%) as lower oil prices reduce oil revenues (despite higher production as Opec+ cuts are gradually unwound) and import growth, driven by project execution, stays strong. Growth in non-oil exports will be robust and the services deficit should continue narrowing, given strong growth in travel and tourism

Weakening in External Balance Sheet: With domestic sources of financing insufficient to meet the needs of the economy, we expect continued large recourse to external borrowing. There is also likely to be less acquisition of foreign assets to reflect the government's commitment to greater domestic investment. As a result, we expect a modest decline in SNFA over our forecast period to 52.5% of GDP in 2026. We forecast the net external creditor position to weaken to 7% of GDP by 2026 from 23.7% in 2024, but this will also remain a strength relative to peers (projected peer median 3.5%).

2024 Budget Deficit Above Target: The 2024 budget deficit is officially estimated at 2.8% of GDP, up from 2% in 2023 as spending growth outpaced that of revenues, with the latter held back by oil revenues due to lower production in line with Opec+ commitments. Fitch estimates the fiscal breakeven oil price at USD96/b in 2024 and forecasts a widening in the deficit in 2025 to 3.8% of GDP, driven by lower oil revenues (budget target 2.3%).

Wider Budget Deficits: This reflects our forecast that oil prices will fall (Brent crude is forecast to fall to USD70/b in 2025 and USD65/b in 2026) and Fitch's expectation that the Aramco extraordinary dividend (distributed in 2023 and 2024 but not budgeted for 2025) will not reoccur. Expenditure is projected to fall due to a cut in capex (boosted in 2024 by one-time land acquisition) and associated current spending.

The medium-term fiscal projections in the budget show a rising deficit (to 2.9% in 2026 and 3% in 2027) and are above those from the 2024 budget (2.3% for 2026), continuing the trend of upward revision. Fitch projects a deficit of 3.9% in 2026. The authorities view the deficits as a policy choice with capex comfortably above their and Fitch's deficit projections over the forecast period. A regular project recalibration exercise has resulted in a scaling back and resequencing of certain projects and gives Fitch some confidence in the ability to adjust investment spending in the event of lower oil prices.

Strong Government Balance Sheet: Fitch projects government debt/GDP to rise to 35.3% of GDP by end-2026, up from 29.8% at end-2024, but still well below the projected peer median of 55.1%. We estimate that government deposits at Saudi Central Bank (SAMA), comprising the government current account and the fiscal reserve, were 10.3% of GDP at end-2024. Contingent liabilities are rising as government-related entities (GRE), particularly the Public Investment Fund (PIF), step up borrowing, but are dwarfed by GRE assets (PIF debt was 4.4% of its assets at end-3Q24).

Oil Lifting Headline Growth: Headline economic growth is set to rebound in 2025 after being held back by cuts to oil production agreed by Opec+. The flash estimate put real GDP at 1.3% in 2024, with the oil sector contracting by 4.5%. Oil production is projected to move broadly in line with the Opec+ agreement from December 2024, meaning an expansion in the oil sector of 2.7% in 2025 and 6.4% in 2026.

Strong and Resilient Non-oil Growth: Non-oil GDP growth drivers appear robust, diverse and resilient to the decline in oil prices Fitch projects over its forecast period. It will be underpinned by strong reform momentum and GRE and government capex, which will push gross fixed capital formation toward a long-term high of 30% of GDP. Non-oil growth was 4.3% in 2024, led by wholesale and retail trade, transport and construction.

Fitch anticipates non-oil growth of a similar pace over 2025 and 2026. Growth should occur in a low inflation environment. Inflation averaged 1.7% in 2024. Currency strength, a still negative output gap and the recalibration of government projects should keep annual average headline inflation below 2%.

Easing Geopolitical Risks: Saudi Arabia is exposed to geopolitical risks, but Fitch judges that these have lessened recently, given the dynamics of the regional conflicts. There were no economic effects evident in 2024. Saudi Arabia is likely to play a role in regional reconstruction. Governance indicators, as measured by the World Bank, improved strongly in 2023 and are 10pp above their 2022, but remain a weakness relative to peers.

ESG - Governance: Saudi Arabia has an ESG Relevance Score (RS) of '5' for Political Stability and Rights and '5[+]' for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. These scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model. Saudi Arabia has a medium WBGI ranking at the 54th percentile with low scores for Voice and Accountability, and Political Stability and Absence of Violence constraining the average.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

-Public Finances: Deterioration in the overall public finance position, reflected in government debt/GDP trending firmly above our forecasts or marked drawdowns of government assets, including government deposits at SAMA.

-Public Finances: Significant increases in contingent liabilities that undermine the strength of the public-sector balance sheet offsetting improvements in narrower government measures, for example, as a result of a sustained rise in GRE debt, particularly if this might not result in productive investments in the economy.

-Structural Features: A major escalation of geopolitical tensions that affects key economic infrastructure and activities over an extended period.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

-Public Finances: Fiscal reforms that increase the budget's resilience to oil price volatility, for example greater non-oil revenue generation or lower expenditure, while also maintaining the strength of the wider public-sector balance sheet.

-Structural Features: A continuation of economic reform that supports strong growth of the non-oil economy.

-Public/External Finances: A sustained period of oil prices markedly above our current forecasts that would allow an improvement in the sovereign and external balance sheets.

Sovereign Rating Model (SRM) and Qualitative Overlay (QO)

Fitch's proprietary SRM assigns Saudi Arabia a score equivalent to a rating of 'A' on the Long-Term Foreign-Currency (LT FC) IDR scale.

Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to SRM data and output, as follows:

- Public Finances+1 notch, to reflect the large government deposits held with the central bank as well as other public-sector assets, including state pension funds, that could be mobilised to support government funding.

Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.

Country Ceiling

The Country Ceiling for Saudi Arabia is 'AA-', 1 notch above the LT FC IDR. This reflects moderate constraints and incentives, relative to the IDR, against capital or exchange controls being imposed that would prevent or significantly impede the private sector from converting local currency into foreign currency and transferring the proceeds to non-resident creditors to service debt payments.

Fitch's Country Ceiling Model produced a starting point uplift of +1 notch above the IDR. Fitch's rating committee did not apply a qualitative adjustment to the model result.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Saudi Arabia has an ESG Relevance Score of '5'' for Political Stability and Rights as World Bank Governance Indicators have the highest weight in Fitch's SRM and are therefore highly relevant to the rating and a key rating driver with a high weight. As Saudi Arabia has a percentile rank below 50 for the respective Governance Indicator, this has a negative impact on the credit profile.

Saudi Arabia has an ESG Relevance Score of '5[+]' for Rule of Law, Institutional & Regulatory Quality and Control of Corruption as World Bank Governance Indicators have the highest weight in Fitch's SRM and are therefore highly relevant to the rating and are a key rating driver with a high weight. As Saudi Arabia has a percentile rank above 50 for the respective Governance Indicators, this has a positive impact on the credit profile.

Saudi Arabia has an ESG Relevance Score of '4'for Human Rights and Political Freedoms as the Voice and Accountability pillar of the World Bank Governance Indicators is relevant to the rating and a rating driver. As Saudi Arabia has a percentile rank below 50 for the respective Governance Indicator, this has a negative impact on the credit profile.

Saudi Arabia has an ESG Relevance Score of '4[+]' for Creditor Rights as willingness to service and repay debt is relevant to the rating and is a rating driver for Saudi Arabia, as for all sovereigns. As Saudi Arabia has track record of 20+ years without a restructuring of public debt and captured in our SRM variable, this has a positive impact on the credit profile.

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/topics/esg/products#esg-relevance-scores.