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Rating Action:

Moody's assigns (P)A1/Aaa.sa rating to Saudi Arabia's domestic Sukuk issuance program

 The document has been translated in other languages

07 Oct 2020

Paris, October 07, 2020 -- Moody's Investors Service, ("Moody's") has today assigned a provisional (P)A1 senior unsecured MTN global scale rating (GSR) and Aaa.sa senior unsecured national scale rating (NSR) to the Government of Saudi Arabia's domestic SAR-denominated Sukuk Issuance Program. Moody's has concurrently assigned a A1/Aaa.sa senior unsecured GSR/NSR to the most recent sukuk instrument issued under that program.

RATINGS RATIONALE

The (P)A1 program rating and A1 sukuk instrument rating mirror the Government of Saudi Arabia's A1 issuer GSR. The Government of Saudi Arabia's A1 GSR is underpinned by the government's robust, albeit deteriorating, balance sheet and supported by substantial external liquidity buffers. The payment obligations associated with the sukuk instrument and any future instruments under the program are direct obligations of the Government of Saudi Arabia, ranking pari passu with all other unsecured indebtedness of the Government of Saudi Arabia and the holders of the Sukuk are therefore effectively exposed to Saudi Arabia's senior unsecured credit risk.

The (P)A1 program and A1 sukuk instrument GSRs map to the Aaa-Aa1 range on the NSR scale published on 2 October 2020. In Moody's view, the instruments issued by the government under the program warrant the strongest Aaa.sa rating by virtue of the sovereign's large footprint in the economy and its capacity to control and/or influence economic, political, and social matters; and its large financial buffers, including FX reserves in the central bank and a robust, albeit deteriorating, balance sheet.

Moody's notes that its program and instrument ratings do not express an opinion on the structure's compliance with the Shariah law.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

As a major oil exporter, Saudi Arabia's environmental risks are predominantly derived from carbon transition (see "Sovereigns -- Hydrocarbon exporters: Carbon transition manageable for most; significant credit pressure in event of more ambitious transition", 3 July 2018). Under a scenario similar to the International Energy Agency's Stated Policies scenario of a gradual slowdown and eventually fall in hydrocarbon demand, Saudi Arabia's credit profile would face downward pressure, although only over the longer-term and with sizeable buffers to provide support. Saudi Arabia is also one of the world's ten most arid states, and rapid growth in recent decades has further increased challenges surrounding water sustainability. The majority of Saudi Arabia's water is produced by desalination plants, which are highly energy intensive. With Saudi Arabia's population forecast to continue to grow rapidly, no improvement in water consumption efficiency could create additional fiscal pressure and/or growth constraints.

Social risks are material for Saudi Arabia's credit profile. Moody's expects that labor market nationalization policies and economic diversification efforts will over time help to reduce the unemployment rate for the nationals (12% in the fourth quarter of 2019). However, these policies may fall short should labor force growth outpace increased availability of jobs in the private sector. In addition, Moody's regards the coronavirus outbreak as a social risk under Moody's ESG framework, given the substantial implications for public health and safety.

Governance risks have an on balance positive impact on Saudi Arabia's credit profile, balancing ongoing improvements in government effectiveness, control of corruption and regulation against weaknesses related to civil society and judiciary. While Moody's acknowledges progress in the past two years on improving economic and financial data transparency and availability, the remaining challenges primarily relate to poor disclosure on the financial performance and debt levels of government-related entities.

GDP per capita (PPP basis, US$): 55,704 (2019 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 0.3% (2019 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): -1.1% (2019 Actual)

Gen. Gov. Financial Balance/GDP: -4.5% (2019 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 5.9% (2019 Actual) (also known as External Balance)

External debt/GDP: 23.2% (2019 Actual)

Economic resiliency: a2

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 05 October 2020, a rating committee was called to discuss the provisional rating of the Government of Saudi Arabia's domestic SAR-denominated Sukuk Issuance Program and the rating of the most recent issuance under this program. The main points raised during the discussion were: The issuer's credit fundamentals and rating level, along with the terms and conditions of the instruments to be issued under the program and the conclusion that these instruments would rank pari passu with other senior unsecured debt obligations of the Government of Saudi Arabia.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Given the (P)A1 sukuk issuance program rating and A1 instrument global scale ratings mirror the A1 issuer global scale rating of the Government of Saudi Arabia, the same factors and considerations apply. The negative outlook on the issuer GSR indicates that an upgrade is unlikely in the near term. In the longer term, increasing evidence that structural reforms aimed at reducing the reliance of Saudi Arabia's economy and public finances on oil revenues will likely be more effective than in Moody's baseline scenario could, over time, support a higher rating. The success of such reforms would likely be reflected in (1) fiscal deficits falling more quickly than currently envisaged and the government debt burden peaking at a lower level and earlier than expected, independent of fluctuations in oil prices; and (2) growth recovering more rapidly and from a more diversified economic base.

The rising likelihood of a materially larger fiscal deterioration, with a markedly faster rise in the government's debt burden and/or erosion of reserve buffers than in Moody's baseline scenario, would likely lead to a downgrade of the global scale issuer rating. Over the longer term, the conclusion that the government's reform efforts will fall substantially short of its economic and fiscal objectives, with the debt burden continuing to rise leaving Saudi Arabia persistently and significantly exposed to further oil market shocks and rising social pressures, would also exert downward pressure on the global scale issuer rating. A further significant escalation of regional geopolitical risks that would threaten Saudi Arabia's oil production and export capacity would also likely lead to the global scale issuer rating being downgraded.

Given the program and instrument NSRs are already at Aaa.sa, there is no possibility of an upgrade. The most likely driver for a downgrade of the NSR would be if the issuer GSR was downgraded from A1, but even then Moody's would expect the government's credit quality to remain one of the strongest within the country, and the NSR mapping would likely be recalibrated around the revised sovereign rating which might see the NSR of the sukuk issuance program and sukuk instruments issued by the government remaining at Aaa.sa.

Given the timing of this new rating assignment and the publication of the Saudi Arabia NSR scale, this rating action is being released on a date not listed in the sovereign release calendar.

The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

Moody's National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale credit ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".za" for South Africa. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in May 2016 entitled "Mapping National Scale Ratings from Global Scale Ratings". While NSRs have no inherent absolute meaning in terms of default risk or expected loss, a historical probability of default consistent with a given NSR can be inferred from the GSR to which it maps back at that particular point in time. For information on the historical default rates associated with different global scale rating categories over different investment horizons, please see https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1216309.

The local market analyst for this rating is Alexander Perjessy, +971 (423) 795-48.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Lucie Villa
VP - Senior Credit Officer
Sovereign Risk Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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