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OIL FALL, HIGHER SPENDING

Fitch revises Saudi IRD ratings to 'negative'

LONDON, August 23, 2015

Fitch Ratings has revised the outlooks on Saudi Arabia's long-term foreign and local currency issuer default ratings (IDR) to negative from stable citing lower oil prices and higher state spending associated with the accession of a new king in January.

The agency affirmed the IDRs at 'AA'.

The issue ratings on Saudi Arabia's senior unsecured foreign and local currency bonds have also been affirmed at 'AA'. The country ceiling has been affirmed at 'AA+' and the short-term foreign currency IDR at 'F1+'.

The revision of the outlook on Saudi Arabia's IDRs to negative reflects the following key rating drivers and their relative weights:

The lower oil prices and higher spending will cause a significant deterioration in the fiscal position, the agency said.

They can widen the general government deficit to 14.4 per cent of GDP in 2015. The policy response has been limited and primarily consists of a reduction in capital spending that will take time to gain traction, it said.

Deficits in the mid-single digits are forecast for 2016 and 2017, assuming reduced capital spending, the absence of new one-off outlays and a gradual recovery in oil prices. Deficits would likely stay in double digits if there was no consolidation.

"We expect deficit financing to erode Saudi Arabia's substantial buffers, a key support for its rating. Drawing down government deposits at the central bank has accounted for virtually all deficit financing so far in 2015," it said.

In July, the government held its first bond auction since 2007. Monthly issuance is planned from August for the rest of 2015. Fitch assumes regular further issuance over our forecast period to 2017. Deficit financing and the drawing down of deposits ring-fenced for specific projects is forecast to reduce the government's net creditor position to 36.4 per cent of GDP at end-2017 from 54.2 per cent at end-2014. Nonetheless, Saudi Arabia will still rank as one of the strongest net creditors of any Fitch-rated sovereign at end-2017, it said.

Sovereign net foreign assets (SNFA) will remain well above the peer median, but the level and trajectory compare unfavourably with regional peers Abu Dhabi, Kuwait and Qatar. A drawdown will pull SNFA to a forecast 84 per cent of GDP at end-2017, versus an average of 191 per cent of GDP for other 'AA' rated GCC peers.

In 2015, lower oil prices are forecast to cause the first current account deficit since 1998. Higher oil prices and spending adjustment should return the account to surplus in 2016. Fitch does not foresee any change to the exchange rate peg to the dollar, which provides a key policy anchor, even though it constrains policy flexibility, it said. - TradeArabia News Service




Tags: Saudi | Rating | Fitch |

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