The debt rating agency Moody’s on Tuesday said it would not change its risk rating on Saudi Arabia, taking a markedly different stance to rival Standard & Poor’s, which last week controversially downgraded the kingdom.
After S&P’s downgrade, the Saudi ministry of finance issued a statement sharply critical of the move and questioned whether there was any new information on which to base its lower rating.
Saudi Arabia is highly sensitive to moves on its debt rating since the oil price crash over the past year has meant it must borrow substantially to cover a rising fiscal deficit.
Moody’s made a point of emphasising that its annual review would result in no change of rating. It has maintained an AA3 rating on the country since it was upgraded in 2010 and the two agencies usually move in tandem on sovereign issuers.
“We have our own methodology and we like to strike a balance between stability and accuracy on the rating,” said Mathias Angonin, Moody’s Dubai-based analyst for Saudi Arabia.
“We could change the rating every day but it wouldn’t add much information to the market,” he said, noting that the main fiscal metrics examined, such as debt-to-GDP and foreign currency reserves, have actually improved since the country’s rating was upgraded five years ago.
S&P lowered its rating to A+ from AA-, which indicates that the country is “somewhat more susceptible to the adverse effects of changes in circumstances”.
Ratings agencies have been criticised over the years for missing big defaults and for potential conflict of interest because they derive the bulk of their income charging issuers to rate their bonds.
That criticism culminated earlier this year in a record US$1.37 billion settlement by S&P with the US department of justice over its role in the collapse of the US mortgage-backed securities market, which precipitated the 2008 financial crisis.
The agencies have recovered in the past few years from a sharp downturn in their business even while they have shown more willingness to downgrade borrowers’ ratings.
The Saudi finance ministry noted after S&P’s move that it was an “unsolicited” rating, which meant that the kingdom had not paid the agency to rate its bonds.
Saudi Arabia is a client of Moody’s, however, so that rating is “solicited” and Moody’s may have had more access to its financial books as a result.
If investors look beyond the headline ratings they will see that Moody’s expects Saudi Arabia’s fiscal deficit to be 17 per cent next year, while S&P expects it to be 16 per cent. The IMF – which has the most complete access to Saudi Arabia’s government finances – is projecting a fiscal deficit of more than 19 per cent.
However, all of its forecasts are based on assumptions about the average oil price for next year, what Saudi Arabia might do in terms of cutting its current and capital budgets, including reforms to long-standing subsidies, as well as other external factors such as regional political turmoil.
As Mr Angonin said, Saudi Arabia – and others, including the UAE – have built up large reserves over the past few years while oil prices were high expressly to act as a buffer for times when oil prices are low.
amcauley@thenational.ae
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