Fitch downgrades Saudi Arabia

Credit rating agency, Fitch has downgraded Saudi Arabia’s Long-term foreign and local currency Issuer Default Ratings (IDRs) from “AA” to “AA-” with a negative outlook, due to the impact of low oil prices.

The agency said the downward revision of its oil price assumptions to $35 per barrel and $45 per barrel for 2016 and 2017 respectively, “has major negative implications for Saudi Arabia’s fiscal and external balances.”

“Real GDP grew 3.4 per cent in 2015, supported by a strong expansion of oil production and continued work on major projects, but growth will slow to 1.5 per cent in 2016 and 1.7 per cent in 2017. We expect oil output to stabilise and non-oil GDP to be hit by fiscal consolidation measures and weaker confidence,” the agency said.

Saudi Arabia’s deficit increased to 14.8 per cent of GDP in 2015, from a deficit of 2.3 per cent in 2014 and continuous surpluses in previous years since 2010.

Though Fitch expects the deficit-to-GDP ratio to reduce marginally in 2016 and more substantially in 2017, on the back of a moderate recovery in oil prices, Saudi Arabia’s deficits have had adverse impact on the country’s domestic debt.

Saudi Arabia is also in negotiations for a syndicated loan of up to $10 billion and is planning to issue a first Eurobond later this year.

“This should push the general government debt-to-GDP ratio to 9.4 per cent of GDP in 2017 from 1.5 per cent in 2014, which will still be low compared with peers (36.9 per cent),” Fitch said.

While Saudi Arabia has instituted fiscal reforms such as utility and fuel price hikes and some taxes, along with renegotiation of projects and spending plans by the government, Fitch says the measures will not avoid a significant erosion of Saudi Arabia’s fiscal and external buffers.

Fitch also considers Saudi Arabia’s geopolitical risks high compared with peers rated AA-. It said the risks stem from tensions with Iran and uncertainty of support for the concentration of economic policy making in the deputy crown prince Mohammed Bin Salman, who is also the defence minister and the chairman of the Council on Economic and Development Affairs.

By Emmanuel Odonkor