(MENAFNEditorial) Moody's Investors Service has today affirmed Saudi Arabia's Aa3 long-term issuer rating and maintained a stable outlook on the rating. This reflects the kingdom's ample financial assets, which will allow it to weather a period of lower oil revenues and maintain a fiscal profile compatible with the current rating.
Moody's long-term and short-term country ceilings for bonds and for bank deposits for Saudi Arabia are unaffected by this rating action and remain at Aa3/P-1.
RATINGS RATIONALE
Saudi Arabia's Aa3 rating retains a stable outlook because the government's very substantial financial resources and low indebtedness indicate that the kingdom's financial strength will remain solid over the coming years, outweighing the negative impact of the recent fall in oil prices. Saudi Arabia has very substantial financial resources that can support a period of fiscal deficits.
In addition, the government's very low level of debt, at 1.6% of GDP at the end of 2014, allows it the flexibility of issuing domestic debt to finance its deficits in the next one or two years. Moody's expects that the financing of the government deficits in the coming two years will come from a combination of debt issuance and drawing down of financial assets. However, while the ratio of government debt to GDP is therefore likely to rise over that period, Moody's expects it to remain very low in comparison to other similarly rated sovereigns and to not pose credit concerns.
Moody's expects that, after a deficit of about 0.6% of GDP in 2014, the government's budget deficit will increase to 12% or more during 2015, mainly the result of the steep fall in oil prices that has occurred during the last half year. Approximately 87% of government revenues came from oil in 2014. However, the Saudi Arabian Monetary Agency has foreign exchange reserves equivalent to about 100% of GDP, as well as considerable domestic financial assets. As a result, the financing of even a fairly large budget deficit should not weaken the government's financial strength in the near term. Even if oil prices were to remain at current levels for the next two years, the government's financial resources would still be substantial, enabling it to finance deficits without a major increase in government debt.
Looking further ahead, the agency's outlook for a rise in oil prices over the next several years suggests that the kingdom's finances will remain compatible with its Aa3 rating. Moody's base case is for oil prices to gradually rise, reaching close to $80 per barrel by 2018. This scenario would imply a gradual reduction in Saudi Arabia's budget deficits over the next few years back to single-digit levels as a percentage of GDP. While government debt levels may rise during this period, reaching perhaps 20% of GDP depending on the evolution of oil prices, Moody's expects debt to remain at levels consistent with the current rating.
What Could Change the Rating Up/Down
A longer period of low oil prices, particularly if this were to be accompanied by policy choices that led to a steeper increase in debt or a sharper diminution of financial assets, would have a more negative impact on Saudi Arabia's credit profile, according to Moody's. Downward pressure on the rating would come if Moody's were to conclude that budget deficits were not likely to decline materially over the coming years and that government debt levels would therefore rise more steeply and to higher levels than now expected.
Alternatively, the rating could move upward over the medium term if the government were to succeed in reducing expenditures and revenues were to rise materially, resulting in a rebuilding of its net financial position.
GDP per capita (PPP basis, US$): 51,779 (2013 Actual) (also known as Per Capita Income)
Real GDP growth (% change): 3.6% (2014 Provisional) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 2.7% (2014 Estimated)
Cen. Gov. Financial Balance/GDP: -0.6% (2014 Preliminary) (also known as Fiscal Balance, excluding grants)
Current Account Balance/GDP: 14.9% (2014 Estimate) (also known as External Balance)
External debt/GDP: 12.8% (2014 Estimated)
Level of economic development: High level of economic resilience
Default history: No default events (on bonds or loans) have been recorded since 1983.
On 30 March 2015, a rating committee was called to discuss the rating of the Saudi Arabia, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have marginally decreased. The issuer's institutional strength/ framework, has not materially changed. The issuer's governance and/or management, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has decreased. The systemic risk in which the issuer operates has increased. The issuer's susceptibility to event risks has not materially changed
The principal methodology used in these ratings was Sovereign Bond Ratings published in September 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used in this rating action, if applicable.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
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