Moody's Investors Service cut Saudi Arabia’s outlook to “negative” from “stable” on Friday due to the severe shock to global oil demand and prices triggered by the coronavirus pandemic.
It attributed its decision to higher fiscal risks for the Gulf nation due to the crash in oil prices, and uncertainty about the Saudi government’s ability to offset the oil revenue losses and stabilize its debt in the medium term.
However, the ratings agency underscored the Kingdom's sovereign credit rating at “A1,” which affirms its economy’s stable competency in light of the global economic crisis.
It pointed out that the Saudi government is “still relatively robust” balance sheet, moderate debt level and substantial fiscal and external liquidity buffers.
The A1 rating is supported by effective monetary policy that preserves the credibility of the exchange rate peg and financial and macroeconomic stability, it explained in a statement.
“There are also early signs of improving fiscal policy effectiveness resulting from structural fiscal reforms, including an enhanced medium-term public finance management framework and better expenditure monitoring and control after last year's implementation of the digital Etimad platform for tracking government contracts.”
“The plans to diversify Saudi Arabia’s economy away from oil could lift the country’s medium- to long-term growth potential,” Moody’s said.
In terms of the Kingdom’s budget, Moody's projected that the fiscal deficit will widen to more than 12 percent from 8.7 percent of GDP in 2020 and more than eight percent in GDP in 2021 from 4.5 percent of GDP in 2019.
This will cause government debt to increase to around 38 percent of GDP by the end of 2021 from less than 23 percent of GDP in 2019, and over the medium term, Moody's projected that Saudi Arabia's government debt will rise to around 45 percent of GDP.
The agency noted that the Kingdom is the world’s second largest oil producer - including condensed and natural gas.
“Vulnerability to oil price declines, which is highlighted again by the ongoing shock, is balanced by the sovereign’s very large hydrocarbon reserves and one of the lowest extraction costs globally, which will support economic resiliency even in a low oil price environment,” it stressed.
In April, Fitch Ratings stressed Saudi’s long-term foreign-currency Issuer Default Rating (IDR) at “A” with a stable outlook.
The positive estimates by overall rating agencies reflect the strength of the Kingdom's financial position and its ability to face challenges, especially in light of the crises and exceptional circumstances the world is currently going through.
“Saudi Arabia still has a far stronger sovereign net foreign asset (SNFA) position than the 'A' category median,” it said.
