Moody’s affirms Saudi Arabia rating on fiscal consolidation moves ECONOMY

Moody’s Investors Service has affirmed Saudi Arabia’s A1 credit rating on expectations that fiscal consolidation will continue in the medium term, stabilising government debt to under 30 per cent of GDP.

The kingdom’s stable outlook indicates that the risks to the ratings are broadly balanced, the credit rating agency said in a statement.

Moody’s expects “the government’s ambitious structural reform agenda will, over time, reduce the exposure of Saudi Arabia’s economy and public sector balance sheet to oil prices”, the agency said.

Saudi Arabia’s economy shrank 0.7 per cent last year after the world’s biggest oil exporter scaled back its spending and cut oil output.

As the country grappled with lower crude prices, Crown Prince Mohammed bin Salman introduced a series of policy reforms designed to diversify government income under Vision 2030, a roadmap for the biggest Arab economy.

In January, the IMF raised its economic growth forecast for Saudi Arabia to 1.6 per cent this year, up from an earlier estimate of 1.1 per cent.

This is below government estimates for GDP to grow 2.7 per cent in 2018.

Last week, Saudi Arabia raised $11 billion in the largest dollar-bond issuance by an emerging-market country in 2018 to help plug a budget deficit caused by low oil prices.

The last time Moody’s changed its rating for Saudi Arabia was in 2016, when it downgraded the country to A1 from Aa3. Earlier this month S&P Global Ratings affirmed Saudi Arabia’s credit rating at A- and kept the outlook stable. The kingdom is rated A+ by Fitch Ratings.

“The government’s reform programme, including plans to balance the fiscal budget by 2023, could over time offer a route back to a higher rating level,” Moody’s said in the statement.

The rating agency’s latest guidance affirming the sovereign credit rating at A1 is based on Saudi Arabia’s announcement of balancing the budget by 2023 rather than the original target of 2020, making the new date more realistic and the diversification programme more credible.

Moody’s expects Saudi Arabia’s fiscal deficit to continue falling over the medium term, with the government financing the budget from debt and fiscal reserves. This policy will ensure government debt stays below 30 per cent of GDP in the next five years. The scenario assumes oil prices stay at an average $60 per barrel in 2018-2019 while remaining within a forecast range of $45 to $65 per barrel in the medium term.

Saudi Arabia’s push for diversification will also be initially boosted by large-scale investment projects focused on the under-developed tourism and entertainment sectors, backed up by the sovereign wealth fund, the Public Investment Fund.

“The reforms will help to sustain the recent increase in the relative size of the non-oil sector of the economy even as the oil sector recovers, and gradually reduce the vulnerability of Saudi Arabia’s economy and public sector balance sheet to declines in oil prices,” Moody’s said.

Risks that may prompt a downgrade in Saudi Arabia’s ratings include a “material” slow-down in fiscal consolidation and the possibility that the kingdom’s reform effort falls short of its objectives, leaving it prone to further shocks from oil price fluctuations, it said.

Other risks include renewed pressure on the exchange rate, faster depletion of foreign exchange reserves and geopolitical risk.