BofA Sees Saudi Rating Risks Another S&P Cut Amid Oil Slump

  • Standard & Poor's lowered sovereign rating on Friday to A+
  • Saudi Finance Ministry says rating downgrade unwarranted

Saudi Arabia faces an “elevated” risk of another credit rating downgrade by Standard & Poor’s as the world’s biggest oil exporter grapples with the slump in crude prices, Bank of America Merrill Lynch said.

The rating agency on Friday lowered Saudi Arabia’s credit rating one level to A+, the fifth-highest classification, saying the oil rout will increase the budget deficit in a country that relies on energy exports for more than 80 percent of its revenue. The International Monetary Fund expects Saudi Arabia to post a fiscal shortfall of more than 20 percent of economic output this year.

"Based on planned fiscal consolidation measures, we think the risk of another downgrade" is elevated, Jean-Michel Saliba, Bank of America Merrill Lynch’s Middle East and North Africa economist, said in an e-mailed report on Tuesday. S&P’s expectation of a budget deficit of 10 percent of economic output next year and 5 percent in 2018 is optimistic, he said.

Search for Savings

The slump in oil prices by more than 40 percent over the last year is slowing growth in the kingdom’s non-oil economy and pushing the government to search for savings, contemplate project delays and sell bonds for the first time since 2007. The Emirates NBD Purchasing Managers’ Index for Saudi Arabia, a measure of growth in the non-oil economy, fell in October to its lowest level in six years, driven by weaker expansion in new business.

In remarks to state television aired on Tuesday, Finance Minister Ibrahim al-Assaf said the kingdom was working on attracting foreign investment as part of efforts to reduce its reliance on oil revenue. Saudi Arabia is ready for the challenges posed by the oil price decline and will overcome them, he said.

The benchmark Tadawul All Share Index for stocks dropped 1.6 percent at the close in Riyadh, extending its losses over the past 12 months to more than 30 percent. The MSCI Emerging Markets dropped 15 percent during the same period.

“We had expected a downgrade, but the timing is somewhat surprising as we had anticipated S&P would wait until the 2016 budget is announced in December,” Saliba wrote in the report.

‘Strongly Disagrees’

The Saudi Finance Ministry said on Saturday that it “strongly disagrees with S&P’s approach to ratings management in this particular instance.” The ministry said the kingdom’s fundamentals “remain strong” and that a “thorough fiscal consolidation plan” would protect fiscal buffers.

The kingdom accumulated hundreds of billions of dollars in the past decade to help the economy absorb the shock of falling prices. Reserves have tumbled more than $75 billion this year to $646.9 billion, the lowest level since November 2012. The biggest Arab economy may run out of financial assets needed to support spending within five years if the government maintains current policies, the IMF said last month.

The S&P rating cut “was not a surprise,” said Mohieddine Kronfol, the Dubai-based chief investment officer for global sukuk and MENA fixed-income at Franklin Templeton Investments Ltd. Yet while the move is unlikely to dampen demand for Saudi debt, “focus will however increase on the credibility of policy initiatives, especially those related to subsidies, taxation, and infrastructure spending,” he said.

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