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After S&P downgrade, Moody’s warning to Saudi Arabia

Moody’s expects lower oil revenues to result in “continued large budget deficits"

Just days after Standard & Poor’s (S&P) cut Saudi Arabia’s long-term foreign and local currency sovereign credit rating by one notch to ‘A+/A-1’ from ‘AA-/A-1+’, saying that a “pronounced swing” in the kingdom’s fiscal balance had prompted its downgrade, another sovereign ratings agency Moody’s has now warned of its weakening fiscal position, while keeping its rating unchanged. Both Fitch and Moody’s continue to have higher ratings for the Kingdom compared to S&P.

Moody’s says it expects lower oil revenues to result in “continued large budget deficits” and, although, measures have been taken recently to rein in expenditure, further cuts will be required, without which the Kingdom’s creditworthiness will be affected.

“Our baseline scenario for the government’s fiscal position shows continuing fairly large deficits, with a resultant material decline in financial assets and a quite substantial build-up of debt, albeit from a low level. If this trend is not moderated, downward pressure on the rating will build up over the coming years,” the report notes.

Saudi Arabia depends on oil for 80 percent of its revenues and Moody’s expects the Kingdom to post a fiscal deficit of $110 billion or 17 percent of GDP, due to a decline of 44 percent in revenues from 2014 and overspending of 19 percent above budgeted levels (which is below the average of 26 percent during the past decade, due to some expenditure cuts).

While it has a substantial financial cushion to weather the fall in oil prices, its foreign assets at over $670 billion are down from a peak of $746 billion at the end of 2014, while its debt of 1.6 percent of GDP in 2014 is expected to rise to 6.4 percent at the end of 2015, as the government finances its deficit by drawing down on reserves and issuing domestic bonds.

“While the Kingdom’s large assets provide a cushion, we believe that further measures to address the deficit will be forthcoming,” says Steven Hess, a Moody’s Senior Vice-President, in its annual CreditAnalysisReport.

According to Moody’s, government deposits at SAMA (the country’s central bank) during the course of 2015 through August declined by SAR302 billion, or equal to 73 percent of its estimated deficit for the year. But “these budget and financing estimates would leave the government in a still strong financial position at the end of 2015,” the report adds.

Moody’s expects Saudi Arabia’s growth to slow to between 2.5 percent and three percent over the next two years, as capital spending slows and the government adapts to lower oil revenues.

This article first appeared in AMEinfo’s sister publication TRENDS