Sunday 01, October 2017 by Georgina Enzer

Moody's assigns A1 ratings to Saudi Arabia's global notes

Moody's Investors Service has today assigned senior unsecured debt ratings of A1 to the global notes issued by the Government of Saudi Arabia under its global medium-term notes (MTN) programme.

RATINGS RATIONALE

The senior unsecured debt ratings mirror the Government of Saudi Arabia's A1 long-term issuer rating.

The Notes, which are issued under the kingdom's existing global MTN programme are direct, unconditional and unsecured obligations of the Government of Saudi Arabia (the issuer), and rank pari passu with all other unsecured external debt obligations of the issuer.

Saudi Arabia's A1 stable long-term issuer rating reflects very high levels of fiscal and economic strength, high institutional strength, and a moderate susceptibility to event risks. Strong growth in oil revenues until the oil price shock in 2014 allowed for the build-up of a sizeable asset cushion and sharp debt reduction. Although the decline in oil prices pushed the budget balance into sizable deficits, eroding the government's reserves and prompting it to issue bonds on the international market for the first time in 2016, the fiscal position remains strong.

Despite rising funding requirements over the rating horizon, in Moody's view the government has access to ample sources of liquidity, both from domestic and international capital markets and is unlikely to encounter problems financing fiscal deficits. While foreign exchange reserves have fallen in light of large current account deficits since 2015, they remain sizable, at $494 billion (equivalent to around 74 per cent of GDP) as of July 2017. External debt is rising, but from a low base, and Moody's expects annual external debt repayments to remain significantly below the critical threshold of 100 per cent of foreign exchange reserves over the coming years.

Saudi Arabia's credit challenges include the economy's high dependence on oil, as well as a rigid government spending structure and government revenues that are vulnerable to oil price volatility. Saudi Arabia has historically experienced strong growth rates, but real GDP growth has decelerated since 2014, mainly due to fiscal consolidation in response to lower oil prices as well as crude oil production cuts. Low growth illustrates both the ongoing economic pressures on economic strength from the oil price shock, but also the fiscal challenges given the plan to get to a balanced budget by 2020.

The government has announced ambitious and comprehensive plans to diversify the economy and government finances in its National Vision 2030. However, significant implementation challenges remain, and Moody's thinks there is a risk that the reform progress might slow down in a scenario of higher oil prices and/or growing public discontent. In Moody's view socio-economic challenges are visible in strong population growth and high unemployment, and the rating also incorporates an element of geopolitical risk, driven by regional instability and the country's strategic rivalry with Iran.

 

WHAT COULD MOVE THE ISSUER RATING UP/DOWN

Fulsome implementation of planned fiscal and economic reforms would be credit positive and could support a higher rating. The success of such reforms would likely be reflected in fiscal deficits falling more quickly than currently envisaged, the government debt burden peaking at a lower level and growth recovering earlier and more rapidly from a broadening economic base. Such developments would be more positive if they resulted from sustainable structural reforms, than from cyclical or temporary increases in the price of oil. A reduction in regional political and security threats would also exert upward pressure on the rating.

Any signs or combination of the following factors would be credit negative, and could lead to a negative rating outlook or downgrade: loosening fiscal consolidation, such as fiscal deficits remaining above 10 per cent of GDP over the coming two years; government debt ratios rising faster than in our baseline scenario and approaching 50 per cent of GDP by 2018; renewed pressure on the exchange rate and a faster depletion of foreign exchange reserves; signs of difficulties to fund large fiscal and current account deficits in 2017 and 2018; an escalation of regional geopolitical risks and/or signs of deteriorating domestic political and social stability.

Given the timing of the issuance, this rating action is being released on a date not listed in the sovereign release calendar.

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