Fitch confirms Saudi at AA- but highlights key risks

Posted on September 1, 2016

Fitch has confirmed Saudi Arabia’s credit rating at AA- with a negative outlook, but identified a slew of risks including a weakening balance sheet and potential spillover from regional conflicts.

The ratings agency said The Saudi government’s balance sheet “has continued to weaken as a result of lower international oil prices”.

As such its debt is likely to rise to 14.7 per cent of GDP by the end of this year, up from just 1.6 per cent in 2014, although still well below the 38.7 per cent median for AA- rated countries.

In May Saudi Arabia borrowed $10bn through a syndicated loan, and is currently in the process of tapping international bond markets for $15bn and potentially more, underscoring the pressure low oil prices are exerting.

The Saudi government has outlined a series of deep spending cuts as part of its “National Transformation Programme”, including a squeeze of about $60bn on public sector salaries and water and energy subsidies.

But Fitch warns:

The economic impact of such a fiscal tightening would be so severe that in Fitch’s view the fiscal objectives will probably have to be scaled down.

In addition, the broad range of other social and economic objectives and the complexity of implementation may overwhelm the administrative capacity of the government.

Fitch predicts this fiscal squeeze will push growth down from 3.5 per cent in 2015 to 0.9 per cent in 2016, 1.1 per cent in 2017 and 1.6 per cent in 2018.

The ratings agency also warns that banking sector liquidity has deteriorated as deposits have declined, pushing the loan to deposit ratio to a record high 91 per cent, which is above the regulatory ceiling of 90 per cent.

Fitch also notes:

Given its exposed position in a volatile region, geopolitical risks are high relative to ‘AA’ category peers. Tensions between Saudi Arabia and Iran persist and Saudi Arabia, together with its coalition partners, is fighting a war against Houthi rebels in Yemen, with no clear prospect of an end to the fighting. There are also sporadic terrorist attacks.

And adds:

Given the high share of young people in the population, the labour force is growing rapidly and the economy will struggle to absorb this growth. This, and the fiscal consolidation measures, may lead to rising disaffection, but widespread domestic unrest is unlikely. While the line of succession has been clearly defined, tensions within the royal family could still be a cause for instability.

While income per capita measures are high, other structural indicators, such the World Bank indicators for governance and the business climate are both well below the medians for both ‘AA’ and ‘A’ rated peers.

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