Global ratings agency Moody’s has given Saudi Arabia an “A1” sovereign credit rating and cut its outlook to “negative” from “stable” in a report published this month.
“The negative outlook reflects increased downside risks to Saudi Arabia’s fiscal strength following the 2020 balance sheet deterioration triggered by the coronavirus pandemic; and the uncertainty regarding the degree to which the government will be able to offset lower oil revenue; reduce spending and stabilize its debt burden and further assets in the medium term;” Moody’s said.
Moody’s said that the negative outlook was likely to change and upgrade to stable on evidence that the government is able to contain the deterioration in its balance sheet; and stabilize and ultimately reverse the debt trajectory through the implementation of fiscal consolidation measures which offset the oil revenue shortfall; possibly also supported by a faster recovery in oil prices.
A strong rating
The agency’s strong rating of Saudi Arabia’s sovereign credit was based on several positive considerations. Among these are: The Kingdom has a very large stock of proven oil reserves; which; at the current rate of production (including condensate and natural gas liquids); will also last close to 70 years; according to the BP Statistical Review of World Energy.
Also; the Kingdom is the second-largest producer of oil; including condensates and natural gas liquids; in the world; which produced around 9.5 million barrels of crude oil a day on average during 2019-20. Saudi Arabia owns large reserves and has some of the lowest extraction costs globally and long-standing industry experience.
Moody’s indicated that Saudi Arabia has improved in nine out of 10 areas measured by the Doing Business 2020 report; and its rank among the 190 assessed countries increased to 62 in 2020 from 82 in 2016.
“In 2016; under the banner of the Saudi Vision 2030; the government announced ambitious and comprehensive plans to diversify the economy away from its reliance of hydrocarbons and government spending; and the governmental Public Investment Fund was given the mandate in order to lead the agenda by co-funding and overseeing several high-profile megaprojects.
“The plans to diversify the economy have the potential to lift the country’s medium- to long-term growth and employment. However; the benefits will likely take many years to materialize and the magnitude of the impact is uncertain due to the long-term nature of the plans and associated implementation risks;” Moody’s said.
With regards to the fiscal reforms; the Moody’s report indicated that the reforms which have been implemented since 2015; including spending cuts and new non-oil revenue measures; have somewhat moderated the sovereign’s vulnerability to oil price declines; as non-oil revenue rose to 14 percent of the gross domestic product in 2020; from 4.5 percent in 2014.
Also; Saudi Arabia’s fiscal position remains comparatively robust; albeit weaker than a few years ago. The Kingdom’s fiscal strength score is at “AA2;” above the initial score of “A3;” as Moody’s reflected the credible peg of the Saudi riyal to the US dollar; backed by the central bank’s large foreign currency reserves; and the fact that most government revenue is denominated in foreign currency. All these factors help to reduce fiscal risks implied by the large share of foreign currency debt in total government debt.
Last; but not least; regarding the Saudi banking risk; Moody’s has indicated that the sector risk is scored at “A” and the strong banking sector is underpinned by a robust regulatory framework and effective supervision; which will limit contingent liability risks for the government.
However; Moody’s expects disruption caused by the pandemic to weigh on the banks’ asset quality; albeit coming from a strong base; as loan deferrals and other regulatory forbearance expire.
I believe that Moody’s has fairly rated the sovereign credit risk of the Kingdom at “A1;” especially when considering both the strengths and challenges laid out in the report; such as the strength of the robust fiscal and foreign currency reserve buffers and prudent financial regulation and the challenge of high economic and fiscal vulnerability to declines in oil demand and prices.