S&P cuts Saudi Arabia to A-
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Standard & Poor’s Ratings Services (S&P) today announced that it had lowered its unsolicited long- and short-term foreign- and local-currency sovereign credit ratings on the Kingdom of Saudi Arabia to A-/A-2 from A+/A-1. The outlook is stable.
At the same time, S&P revised downward our transfer and convertibility (T&C) assessment on Saudi Arabia to ‘A’ from ‘AA-‘.
In mid-January 2016, S&P lowered its oil price assumptions for average Brent to $40 a barrel in 2016, with a gradual increase to $50 a barrel in 2018 and beyond.
“When we last reviewed Saudi Arabia, we expected Brent oil prices to average $55 a barrel in 2016 and $70a barrel by 2018,” S&P said. @We do not expect the agreement on Feb 16, 2016, between oil ministers from Qatar, Russia, Saudi Arabia, and Venezuela to freeze oil output at the levels reported in January to have a material impact on our oil price assumptions.”
S&P said the general government deficit will likely average about 9 per cent of GDP in 2016-2019, approximately 2 per cent of GDP higher than its October 2015 projections.
“We have also increased our forecasts for the annual change in general government debt (which is our preferred fiscal metric because in most cases it is more comprehensive than the reported headline deficit) to about 7 per cent of GDP,” S&P said.
The government has budgeted for a central government deficit of about 13 per cent of GDP in 2016 compared with 15 per cent in 2015, with revenues falling by 16 per cent and expenditures by 14 per cent, compared with the 2015 outturn. This modest deficit adjustment reflects the government’s desire to support economic growth, S&P said.
It said the budget is based on oil at about $45 a barrel.
“We expect the government’s fiscal consolidation plan will likely include postponing some capital spending projects, increasing non-oil revenues, and controlling current expenditures,” S&P said. “The government has embarked on a program of subsidy reform, with fuel, water and electricity prices set to rise gradually over the next five years. As a result, we understand it will reduce subsidies that amounted to about 8 per cent of GDP in 2015. Concurrently, through increased utility tariffs, we expect to see stronger profitability at government-related entities, in turn resulting in higher dividends for the government.”
S&P said taxes on undeveloped plots of land in urban areas to encourage their development is at an advanced stage and the introduction of VAT is planned.
“Over the next three years, we expect Saudi Arabia will finance its deficits, combining drawing down of fiscal assets and issuing debt,” S&P said. “For the purposes of calculating the annual change in government debt, we have assumed an even split between asset draw-downs and debt issuance, implying an average increase of about 7 percentage points of GDP in nominal gross general government debt per year. Such a split would also imply that Saudi Arabia would report gross liquid financial assets of 110 per cent of GDP by 2019, versus 129 per cent at year-end 2016.”
S&P said it has reduced its real GDP growth forecasts for 2016-2019 to an average of 2 per cent a year from about 3 per cent. There will also be larger current account deficits, equivalent to 14 per cent of GDP in 2016.
“The stable outlook reflects our expectation that the Saudi Arabian authorities will take steps to prevent any further deterioration in the government’s fiscal position beyond our current expectations,” S&P said. “We could lower our ratings on Saudi Arabia if we observed further deterioration of public finances beyond our current expectations that could lead to a drop of liquid government financial assets to below 100 per cent of GDP. The ratings could also come under pressure if we observed a significant increase in domestic or regional political and economic instability. We could raise the ratings if Saudi Arabia’s economic growth prospects improved markedly beyond our current assumptions.”
Saudi Arabia’s Finance Ministry criticised S&P for cutting its rating to A+ from A++ in October.