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Fri 9 Dec 2016 10:33 AM

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Saudi Arabia could see sovereign credit rating slashed over deficit

Fisch Asset Management says austerity, privatisation and taxation measures not enough to reduce deficit enough

Saudi Arabia could see sovereign credit rating slashed over deficit

Cost-cutting pressure and declining government investments in Saudi Arabia will put pressure on medium-term growth in the Gulf kingdom, according to redit analysts Fisch Asset Management.

A credit report by Independent Credit Review, a subsidiary of Fisch, claims that austerity, privatisation and taxation measures in the kingdom will not be sufficient to reduce the deficit to the desired extent in the stated timeframe.

The report affirms a rating of A- for Saudi Arabia’s sovereign credit, with the expectation that rating agencies will downgrade the kingdom by 1-2 notches over the next 18 months.

Such a likelihood would be reinforced by a slowdown in the oil price recovery or signs that domestic reforms are taking longer than timetabled, the report said. 

The study said that compared with the UAE, Qatar and Kuwait, Saudi Arabia faces the greatest economic challenges. Its fiscal breakeven oil price in 2015 was $95, versus an average of $74 for its peer group, it added.

The report said that a 35 percent reduction in expenditures at an oil price of $35/barrel or a 20 percent reduction at $50/barrel would be required to achieve a balanced budget for 2016. This leads to the expectation that Saudi Arabia will record a deficit of approximately $80-90 billion (13 percent of GDP).

Peter Jeggli, head of research at Fisch Asset Management, said: “Despite pressure on its credit rating, the kingdom retains a number of key strengths. It has exceptionally large oil reserves and as the world’s largest producer it has traditionally been able to influence supply and pricing in the global market.

"The country’s oil reserves have a life expectancy of at least 70 years, which is a long time in economic terms.

"Saudi Arabia’s substantial foreign currency reserves give it considerable flexibility, while the government still has a relatively low level of debt. The country has a stable and adequately capitalised banking system, albeit with rising credit default rates, and a strong relationship exists between the government and the banks.

"Perhaps most importantly, sweeping cost-cutting and restructuring measures driven by Vision 2030 and the National Transformation Plan will play a vital role in economic diversification. We look forward to seeing these come to fruition.”