Kingdom deserves credit where it’s due
It came as a surprise when Fitch on Monday downgraded its credit rating for Saudi Arabia from A+ to A. The rating agency cited the Kingdom’s vulnerability to geopolitical tensions, of which the drone and missile attacks on the Abqaiq processing plant and Khurais oilfield were considered indicative. It further explained its move by its view on the Kingdom’s budget deficit which the agency expects to come in at 6.7 percent in 2019, up
0.8 percent from the previous year, as well as its negative outlook on oil prices.
The other two rating agencies, Standard and Poor’s (S&P) and Moody’s, did not change their risk assessment of the country. Indeed S&P affirmed its A rating in the aftermath of the strikes, indicating however that it would have to review things if there were repeated attacks on critical infrastructure.
Saudi Arabia’s Ministry of Finance was quick to respond. It disagreed with Fitch on the grounds that Aramco fully restored production by Sept. 25, that the budget was within the parameters set for 2019, that the Kingdom’s reserves amply covered its liabilities, and that the country was proceeding with the investment requirements of Vision 2030 according to plan.
Where does this leave us? It is within the purview of credit agencies to express their risk assessment within their guidelines. The onus is then on the rated country or company to respond to their concerns, which the Ministry of Finance has done.
In this case Fitch’s rating might have been hasty. Saudi Arabia has not changed its geographic location. The GCC has long been an island of stability in a sea of armed conflict and unrest that is the Middle East. What holds true for KSA equally holds true for the UAE, Kuwait, Bahrain or Oman.
It is in the nature of an island that on occasion it is exposed to one or the other wave from the rough seas. The measure has to be, what the reaction to the adversity is. Here, Saudi Arabia has to be given 10 out of 10 in the aftermath of the attacks.
The drone strikes proved just how resilient and well run the Kingdom’s most important company, Saudi Aramco, is. Production was restored in full by Sept. 25 – ahead of schedule; and Aramco’s capacity will be back to normal by the end of November.
The diplomatic and military apparatus has also gone into full gear addressing air defense vulnerabilities. Among other things, this is evidenced by the strengthened cooperation with the US army. Around 1,500 troops will shortly be arriving in Saudi Arabia, precisely to work on these issues with the Royal Saudi Armed Forces.
So much for the reaction to the attacks. What about the potential economic impact of the downgrade?
According to all three rating agencies, KSA is still in solid investment grade territory with a stable outlook. It is the largest economy in the Middle East. In the current economic outlook where interest rates are set to be lower for longer, investors are hungry for returns. This is why the downgrade only minimally affected the returns on the outstanding dollar-denominated bonds of the Kingdom.
The question is what the rating’s impact, if any, is on the upcoming dollar-denominated sukuk and maybe on how investors perceive the Aramco initial public offering (IPO)?
There again, investors are hungry for yield and quality, which means we should not be overly concerned. Anyone would be hardpressed to find another company of Aramco’s standing and quality. It remains the world’s most profitable company.
This being said, the powers that be in the country still need to work with the rating agencies to convince them that the downgrade was not justified. Saudi Arabia can make a very strong case. The conversations may at times prove difficult, but they are necessary, nonetheless. Then, nothing really worthwhile was ever easy.