Saudi Arabia’s credit worthiness was cut one level by Fitch Ratings, which said low oil prices were worsening public and external finances.
Fitch reduced Saudi Arabia’s rating to A+, the fifth-highest investment grade, and changed the outlook to stable from negative, the agency said in a statement on Wednesday. The downgrade reflects “the continued deterioration of public and external balance sheets, the significantly wider than expected fiscal deficit in 2016 and continued doubts about the extent to which the government’s ambitious reform program can be implemented,” Fitch said.
“The primary reason is really the impact on public finances of lower oil prices, even though oil prices have started to come up again,” James McCormack, global head of sovereign ratings at Fitch, said in an interview on Bloomberg Television on Thursday. “The government has a plan to address that so we think the deficit is going to be much lower this year.”
The benchmark Tadawul All Share Index was up 0.5 percent at 12:33 pm in Riyadh.
The downgrade by Fitch “was anticipated,” the Finance Ministry said in an emailed statement. Saudi Arabia’s economic fundamentals are strong, it said. Fitch’s cut puts its Saudi rating on par with that of Moody’s Investors Service. Both classify the kingdom two levels above S&P Global Ratings.
Saudi Arabia, where more than 60 percent of government revenue last year came from oil, reported a 15 percent rise in the federal government budget deficit to 17.3 percent of economic output in 2016, Fitch said. Net foreign assets of the central bank, or the Saudi Arabian Monetary Authority, fell by $49.5 billion, or 7.7 percent of gross domestic product, between June 2016 and January 2017.
The figure Fitch used for the 2016 budget deficit is higher than the level the government considers official because it includes payments owed to contractors from previous years.
Deputy Crown Prince Mohammed bin Salman, the 31-year-old son of King Salman bin Abdulaziz Al Saud, has begun a program to overhaul the economy and repair public finances by cutting subsidies and state spending. The kingdom also plans to sell as much as 5 percent of oil giant Saudi Aramco in an IPO as part of a plan to set up the world’s biggest sovereign wealth fund.
“It’s very hard to argue that Saudi economic policy is worse now than it was two years ago,” said Crispin Hawes, London-based managing director for Teneo Intelligence. “If anything it’s slightly better, and it’s in the process of breaking through some absolutely essential taboos in terms of the ability to raise revenue from sources other than crude oil.”
Fitch said the Saudi measures will help to contain further balance sheet erosion, but it is unlikely that they will all be achieved. The scale of the reform agenda risks overwhelming the government’s administrative capacity, while the economy may not be able to absorb rises in domestic fuel prices or the planned levies on expatriates, the agency said.
“The fundamentals of the Saudi economy remain strong,” Finance Minister Mohammed Al-Jadaan said in the Saudi statement. General government assets are equivalent to more than 100 percent of economic output, and the government has rolled out “concrete structural reforms” to reduce dependence on oil, diversify the economy and rein in overspending, he said.
The government will likely face difficulties implementing the reforms in full, McCormack said.
“There is going to be an improvement in public finances, there is going to be a restructuring of the economy, but probably not to the degree that the government would like,” he said. “It’s a very, very ambitious agenda, and it’s a medium- to long-term agenda -- it’s not something that can be fixed in a year or two years.”
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