Fitch downgrades Saudi credit rating

The credit ratings agency Fitch has downgraded Saudi Arabia by a notch to AA minus as lower oil prices continue to widen the deficit of the world’s biggest oil producer.

However, the downgrade, which follows on the heels similar cuts by other rating agencies including Standard & Poor’s, still keeps the country firmly in the higher echelon of investment grade issuers.

Fitch said on Tuesday it took the move to lower its rating on Saudi Arabia because of its own in-house downward revision of oil price expectations to US$35 per barrel in 2016 and $45 per barrel in 2017. It did not say what the estimates were reduced from.

“The downward revision of our oil price assumptions for 2016 and 2017 … has major negative implications for Saudi Arabia’s fiscal and external balances,” said credit analysts at Fitch led by Jan Friederich.

As well as lowering Saudi Arabia’s long-term foreign and local currency issuer default ratings to AA- from AA, Fitch said that the outlooks on those also remain negative. The agency said that in addition to lower prices, the country’s widening central government deficit was another factor that prompted the downgrade.

The deficit widened to 14.8 per cent of GDP in 2015 from 2.3 per cent in 2014 amid the collapse of oil prices from mid-2014. Since then, oil has shed more than 60 per cent of its value.

Deficits in countries across the region, including the UAE and Saudi Arabia, have also widened over the past year as the steep drop in oil prices empties coffers and forces governments to dip into sovereign wealth funds and borrow more money so they can keep spending on infrastructure and social services.

Some countries have been more affected than others, according to how dependent they are on oil. At the top of the list of those reeling the most from lower oil prices is Saudi Arabia, while the UAE leads those that are least dependent.

Political concerns may also weigh on future rating decisions for Saudi Arabia, Fitch seemed to suggest in its note, amid rising tensions in the Middle East.

“Fitch considers geopolitical risks high relative to AA-rated peers,” the note said. “Tensions have risen between Saudi Arabia and its long-standing regional rival Iran, and are expected to persist, although a direct confrontation is highly unlikely. Saudi Arabia’s military intervention in Yemen and in Syria shows a greater assertiveness in foreign policy.”

Fitch’s rival S&P downgraded Saudi Arabia’s long-term rating a notch in October, from AA minus to A plus with “a negative outlook”, citing “a pronounced negative swing in Saudi Arabia’s fiscal balance”.

The country’s credit grade was then cut two levels to A minus from A plus in February, as the decline in oil price continued unabated – 90 per cent of Saudi Arabia’s budget is funded from the sale of crude oil.

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