Saudi’s aging population could drag on public debt
No-policy-change scenario would weigh on ratings: S&P
RIYADH, July 11: Saudi Arabia’s growing elderly population could put pressure on public finances and government debt over the next three decades in the absence of government reforms to contain the cost of age-related spending, according to our analysis. In line with United Nations figures, we forecast the Saudi Arabian population will expand rapidly from 32 million to 46 million between 2015 and 2050. Over the same period, the proportion of elderly people will rise to 15 percent of total inhabitants from 3 percent today.
As a result, age-related government expenditure on pensions and health care would rise to 14 percent of GDP by 2050 from 6 percent today. This could lead to a rapid increase in Saudi Arabia’s net debt ratio to 340 percent of GDP by 2050 if governments were to take no further policy action. The sovereign credit ratings on Saudi Arabia would decline to speculative-grade in such a scenario, which is not our base case.
Owing to growth in the young population, subscribers to Saudi Arabia’s generous pension system have been outstripping growth in the number of beneficiaries, contributing to the overall financial health of the system. However, over time, we believe Saudi Arabian governments will likely consider demographic reforms to the system to ensure its sustainability.
S&P Global Ratings’ analysis of Saudi Arabia is part of a global study conducted to analyze the cost of aging. We presented our findings in “Global Aging 2016: 58 Shades Of Gray,” published April 28, 2016, on RatingsDirect. The study explores various scenarios--including a no-policy-change scenario — and the implications that we currently believe these different scenarios could have on sovereign ratings over the next several decades. We included an additional eight sovereigns in this year’s report, which expanded the scope of the study’s coverage to a total of 58 sovereigns, representing 70 percent of the world’s population. For the 50 sovereigns that we included in the previous edition of our Global Aging series, our findings this year provide an update of our analysis — including information on long-term demographic, macroeconomic, and budgetary trends, all in the context of the countries’ current fiscal positions.
The analysis suggests that in Saudi Arabia, the old-age dependency ratio will rise to 23 percent in 2050 from 4 percent in 2015 (see table below; the old-age dependency ratio is the number of people 65 and older divided by the number of those 15 to 64). Overall, we expect the population will rise steadily from 32 million in 2015, to 39 million in 2030, and 46 million by 2050. However, while the share of the working age population will likely rise from 69 percent in 2015 to over 70 percent in the decade 2025-2035, we project it will start to decline again to 66 percent by 2050.
In our view, an aging population will likely place substantial pressure on economic growth and public finances. Demand for publicly provided health care and long-term care services and state pensions could increase. Without further government reforms (not our base-case scenario), total age-related public expenditures in Saudi Arabia are projected to rise by about eight percentage points to 14 percent of GDP in 2050 from about 6 percent in 2015. This increase is greater than the projected 3.7-percentage-point increase for the median of our 58-sovereign sample. We expect that the bulk of Saudi Arabia’s age-related spending will go toward pension outlays, projected to rise to about 9 percent in 2050 from about 3 percent in 2015. (see table). An additional factor that could affect our current projections for Saudi Arabia is the cost of long-term care — which is likely to increase as the economy grows. We have not included this factor in our simulations. For example, we expect advanced economies will face a median increase in long-term costs of 1.2 percent of GDP from 2015 to 2050.
Such dynamics suggest a significant deterioration in Saudi Arabia’s budgetary position in the long term. If unmanaged, the weight of general government spending could rise significantly as age-related spending increases, coupled with a rising interest bill as deficits and debt mount. Our analysis suggests that without fiscal or structural policy reforms, net debt could rise to 340 percent of GDP by 2050 in Saudi Arabia, higher than the sample median, which stands at 134 percent of GDP. This would make Saudi Arabia one of only six sovereigns with net debt levels above 250 percent in 2050, the others being Brazil, China, Japan, Russia, and the US.
Such macroeconomic and fiscal dynamics would imply a change to the current ‘A-’ long-term foreign currency sovereign rating on Saudi Arabia. Based on the fiscal projections of our study, we derived hypothetical sovereign credit ratings for Saudi Arabia (see table). In practice, S&P Global Ratings takes a large number of factors into consideration when determining sovereign credit ratings (see “Sovereign Rating Methodology,” published Dec 23, 2014). In the very long term, however, prolonged fiscal imbalances and wealth (as measured by GDP per capita) tend to become the dominant factors. Under our hypothetical no-policy-change scenario, our current ‘A-’ rating on Saudi Arabia would likely come under increasing pressure over the next 30 years. By 2045, we expect that Saudi Arabia’s fiscal indicators will have weakened such that they would be more in line with sovereigns currently rated in the speculative-grade category, because, in our view, the projected improvement in GDP per capita would not be able to offset the potential fiscal deterioration.