Fitch downgrades Saudi Arabia; borrowing may have benefit

Fitch Ratings downgraded the long-term foreign and local currency Issuer Default Ratings (IDRs) of Saudi Arabia from AA to AA- earlier this month as analysts cited a downward revision on oil price estimates and a widening of the central government deficit from 2.3 percent  of GDP in 2014 to 14.8 percent in 2015.

Fitch noted that the Saudi government will meet some of its financial needs by getting rid of foreign financial assets and borrowing. Negotiations are in the works for a syndicated loan of up to $10 billion, which Saudi Arabia hopes to borrow from various U.S., European and Asian backers. Analysts note strong interest for participation in the loan, the kingdom's first borrowing of its kind since 1991.

Analysts also cited a Saudi debt-to-GDP ratio of 9.4 percent projected for 2017. Although this is much lower than the debt-to-GDP ratio of some other countries in the region, it represents an increase from 2014, where the debt-to-GDP ratio for the Saudis was down to 1.5 percent. As for GDP growth, Saudi Arabia's GDP grew 3.4 percent in 2015 but experts expect growth will slow to 1.7 percent in 2017.

In addition, the Saudi sovereign net foreign asset position will go from 113 percent of GDP to 78 percent in 2017. Experts look at these sovereign wealth positions in context, where big players such as Kuwait and Qatar dominate the field in terms of investment activities.

“The pace of fiscal consolidation has increased.” Fitch analysts wrote. “Utility and fuel prices have been hiked and some taxes raised. Further reforms are to be presented as part of a National Transformation Program that, if implemented, would boost non-oil revenues and streamline spending sustainably. According to press reports, the measures could raise non-oil revenue by $100 billion per year by 2020. In addition, the government is reprioritizing and renegotiating projects and spending plans to make substantial savings. … We expect oil output to stabilize and non-oil GDP to be hit by fiscal consolidation measures and weaker confidence. Monetary policy remains constrained by the peg to the U.S. dollar, although this provides an important nominal anchor. Despite heightened speculation about devaluation, a change in the peg remains highly unlikely.”

Analysts also look at the consolidation of capital in the hands of individuals, as well as geopolitical risks, for example, a proxy conflict in Yemen whereby, Fitch says, Saudi Arabia “shows a greater assertiveness in foreign policy.”

Fitch contrasts Saudi Arabia to other countries in the region:

“Structural indicators are generally weaker than peers, despite recent improvements in some areas. GDP per capita and World Bank governance indicators are well below peer medians. The World Bank measure for voice and accountability is the lowest among all rated sovereigns.”

Analysts cite lower return on equity in the banking sector, slowdowns in loan growth and other factors, while conceding that the banking sector “remains well supervised with conservative regulation in place.”

"The downgrade means that the Saudi government will have a lower probability of being able to repay their debts in the mind of Fitch." Jason Fink, a professor at the James Madison University College of Business told the Gulf News Journal on Friday.

As for the “structural benefits” cited by Fitch, Fink said, analysts are probably seeing a big potential market for Saudi bonds.

“There’s an infrastructure in existence … to bid on bonds,” Fink said, “And the government may pay a lower interest rate … it might indicate there’s a ready-made group of people to buy their bonds.”

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