Fitch Downgrades Saudi Arabia to 'AA-'; Outlook Remains Negative
OREANDA-NEWS. Fitch Ratings has downgraded Saudi Arabia's Long-term foreign and local currency Issuer Default Ratings (IDRs) to 'AA-' from 'AA'. The Outlooks on the Long-term IDRs remain Negative. The Country Ceiling is affirmed at 'AA+' and the Short-term foreign-currency IDR is affirmed at 'F1+'.
KEY RATING DRIVERS
The downgrade of the IDRs reflects the following key rating drivers:
The downward revision of our oil price assumptions for 2016 and 2017 to USD35/b and USD45/b, respectively, has major negative implications for Saudi Arabia's fiscal and external balances. The central government deficit widened to 14.8% of GDP in 2015, after a deficit of 2.3% in 2014 and continuous surpluses in previous years since 2010. Fitch forecasts the deficit-to-GDP ratio to narrow only marginally in 2016 and, on the back of a moderate recovery in oil prices, more substantially in 2017.
A large share of the government's financing needs will be funded by disposing of foreign financial assets, but the government has also started raising debt domestically. It is also in negotiations on a syndicated loan of up to USD10bn and is planning a first Eurobond issue later this year. This should push the general government debt-to-GDP ratio to 9.4% of GDP in 2017 from 1.5% in 2014, which will still be low compared with peers (36.9%).
The sovereign net foreign asset (SNFA) position will decline quite sharply to 78% of GDP in 2017 from 113% in 2014. While this will still be one of the highest ratios among Fitch-rated sovereigns, it will be considerably less than half of SNFA/GDP for Kuwait, Abu Dhabi or Qatar. In 2015, the current-account balance recorded a deficit of 8.2% of GDP, Saudi Arabia's first since 1998, which we expect to worsen to 14% in 2016.
The pace of fiscal consolidation has increased. Utility and fuel prices have been hiked and some taxes raised. Further reforms are to be presented as part of a National Transformation Programme that, if implemented, would boost non-oil revenues and streamline spending sustainably. According to press reports, the measures could raise non-oil revenue by USD100bn per year by 2020. In addition, the government is re-prioritising and re-negotiating projects and spending plans to make substantial savings.
The authorities will be careful to sequence fiscal reforms to avoid adverse social consequences. Even if fully implemented, the measures will not prevent a substantial erosion of fiscal and external buffers during 2016 and 2017, although the buffers will still be sufficiently high to constitute an important rating strength.
Saudi Arabia's IDRs also reflect the following key rating drivers:
Real GDP grew 3.4% in 2015, supported by a strong expansion of oil production and continued work on major projects, but growth will slow to 1.5% in 2016 and 1.7% in 2017. We expect oil output to stabilise and non-oil GDP to be hit by fiscal consolidation measures and weaker confidence. Monetary policy remains constrained by the peg to the US dollar, although this provides an important nominal anchor. Despite heightened speculation about devaluation, a change in the peg remains highly unlikely.
Control over economic policy making has been concentrated in the hands of Prince Mohamed bin Salman, the deputy crown prince and son of the king who is also chairman of the Council on Economic and Development Affairs as well as defence minister. This may have contributed to an acceleration of the economic policymaking process, but has also reduced the predictability of decision-making. The degree of support for this accumulation of power from other parts of the royal family is uncertain.
Fitch considers geopolitical risks high relative to 'AA'-rated peers. Tensions have risen between Saudi Arabia and its long-standing regional rival Iran, and are expected to persist, although a direct confrontation is highly unlikely. Saudi Arabia's military intervention in Yemen and in Syria shows a greater assertiveness in foreign policy.
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.
The banking sector remains healthy but the weaker economic climate has started to affect profitability, with the return on equity falling to 14.5% in 4Q15, the lowest since 2013. A slowdown in loan growth will accompany a moderate rise of the ratio of non-performing loans- to-total gross loans, from a low level of 1.2% in 2015. The sector remains well-supervised with conservative regulation in place.
The main factors that could lead to a downgrade are:
-Continued erosion of fiscal or external buffers.
-A slower-than-expected narrowing in the fiscal deficit, for example as a result of a failure to implement fiscal reforms or due to a renewed fall in oil prices.
-Spill-over from regional conflicts or a domestic political shock that threatens stability or affects key economic activities.
The Outlook is Negative. Consequently, Fitch does not currently anticipate developments with a material likelihood of leading to an upgrade. However, the following factors could lead to the Outlook being revised to Stable:
-Fiscal consolidation sufficient to stem the depletion of fiscal and external buffers and put the budget on a path to a surplus.
-A sustained period of higher oil prices.
Fitch forecasts Brent crude oil prices to average USD35/b in 2016 and USD45/b in 2017.