Paris, May 01, 2020 -- Moody's Investors Service, ("Moody's") has
today changed the outlook to negative from stable on the Government of
Saudi Arabia's issuer rating and affirmed the issuer and senior unsecured
A1 rating, and the (P)A1 senior unsecured MTN rating.
The negative outlook reflects increased downside risks to Saudi Arabia's
fiscal strength stemming from the severe shock to global oil demand and
prices triggered by the coronavirus pandemic, and from the uncertainty
regarding the degree to which the government will be able to offset its
oil revenue losses and stabilize its debt burden and assets in the medium
The rapid and widening spread of the coronavirus pandemic, which
has led to a sharp deterioration in the global economic outlook and,
relatedly, to a very large fall in the price of oil, has created
an unprecedented shock to a wide range of regions and markets.
Moody's regards the coronavirus outbreak as a social risk under its ESG
For Saudi Arabia, the shock transmits mainly through the loss in
government revenue and exports caused by the drop in oil demand and prices.
The government's balance sheet has weakened since the previous oil
price shock in 2015-16, notwithstanding some recent improvements
in budget execution, leaving the sovereign's credit profile
exposed to the further prolonged period of depressed oil prices that the
pandemic may usher in.
Saudi Arabia's A1 rating is supported by the government's still
relatively robust, albeit deteriorating, balance sheet,
which is underpinned by a still-moderate debt level and substantial
fiscal and external liquidity buffers. The government's vulnerability
to oil price declines is balanced by the sovereign's very large
hydrocarbon reserves and low extraction costs, which support economic
resiliency even in a low oil price environment.
Moody's has also affirmed the A1 backed senior unsecured rating
of KSA Sukuk Limited, and its (P)A1 backed senior unsecured medium-term
note program rating. KSA Sukuk Limited, a special purpose
vehicle incorporated in the Cayman Islands, is wholly owned by the
Government of Saudi Arabia and its debt issuance is, in Moody's
view, ultimately the obligation of the Government of Saudi Arabia.
Saudi Arabia's long-term foreign-currency bond and bank
deposit ceilings remain unchanged at A1, and the short-term
foreign-currency bond and bank deposit ceilings remain unchanged
at Prime-1. Saudi Arabia's long-term local-currency
country risk ceilings remain unchanged at A1.
RATIONALE FOR THE CHANGE IN THE OUTLOOK TO NEGATIVE FROM STABLE
SHARP OIL PRICE SHOCK TO INCREASE DEBT AND ERODE SOVEREIGN'S FISCAL
Due to depressed global oil demand arising from the spreading coronavirus
outbreak, and taking into account a supply response by the world's
major producers, Moody's has revised down its oil price assumptions
for 2020 and 2021 to an average of $35/barrel and $45 respectively
(Brent). Moreover, while Moody's expects oil prices
to continue to recover gradually in the medium term as demand is restored,
the risks to both the short- and longer-term price assumptions
are now very much on the downside.
The oil price environment now and potentially over the next few years
marks a significant change from Moody's previous assumptions and
creates downside risks for Saudi Arabia's already eroding fiscal
strength due to the sovereign's still heavy reliance on oil revenues.
Based on these oil price assumptions and Saudi Arabia's commitment
to cut oil production, Moody's now expects that government
revenues will drop by about 33% in 2020 and about 25% in
2021 relative to 2019, even after accounting for potentially higher
dividends from state-owned entities. A sharp slowdown in
GDP growth will also depress revenue from the non-oil sector,
although the impact on the government's overall budget will be limited
given a relatively narrow revenue base dependent on non-oil activity.
The government will likely compensate some of the revenue loss this year
and in 2021 through spending cuts. It has already announced a plan
to cut expenditure by SAR 50 billion (about 2% of GDP) on top of
SAR 39 billion (1.6% of GDP) already included in the 2020
budget. Moody's expects that some additional cuts will be
implemented, while higher health spending related to containing
the pandemic will be accommodated within that reduced expenditure envelope.
Last year's 1.6% of GDP spending cut relative to the
approved budget, which was aimed at achieving the fiscal deficit
target despite lower than budgeted oil revenues, together with evidence
of deep spending cuts during the previous oil shock in 2015-16
supports the view that spending cuts will mitigate the revenue shortfall
However, despite these offsetting measures, Moody's
projects that the fiscal deficit will widen to more than 12% of
GDP in 2020 and more than 8% in GDP in 2021 from 4.5%
of GDP in 2019. This will cause government debt to increase to
around 38% of GDP by the end of 2021 from less than 23%
of GDP in 2019. These projections assume significant drawdowns
from the government's liquid assets, worth around 7%
of GDP in 2020-21, in order to contain the sovereign's
borrowing requirements. The bulk of the government's liquid
fiscal buffers are on deposit with Saudi Arabian Monetary Authority (SAMA),
managed as part of SAMA's foreign currency reserves.
Over the medium term, Moody's projects that Saudi Arabia's
government debt will rise to around 45% of GDP. Its trajectory
from that point will depend on what measures the government takes to arrest
and reverse its rise. The effectiveness of those measures will
in turn depend in part on the path of the oil price. On both counts,
the balance of risk is biased to the downside. The negative outlook
reflects the risk that the debt burden continues to rise, either
because oil prices remain depressed around the current levels for longer
than Moody's currently assumes and/or because offsetting fiscal
measures are less effective or reversed in the next few years.
Following the previous oil price shock, deep spending cuts implemented
during 2015-16 were almost fully reversed by 2018 as oil prices
Meanwhile, Moody's expects that the current account balance
will shift into a deficit of around 6% of GDP in 2020 and 1%
of GDP in 2021 from a surplus of 6.3% of GDP in 2019,
adding to the erosion of SAMA's foreign currency reserves.
Moody's expects foreign exchange reserves to decline below $375
billion at the end of 2021 from $488 billion (excluding gold,
SDRs and its position with IMF) at the end of 2019, although at
these levels reserve adequacy to cover imports and external debt payments
will remain ample.
RATIONALE FOR THE RATING AFFIRMATION
Despite the past and expected deterioration in fiscal strength,
Saudi Arabia's fiscal and foreign currency buffers remain large,
albeit materially lower than a few years ago.
Moody's estimates that liquid sovereign assets, which include
government deposits with SAMA and liquid assets of the Public Investment
Fund, were around 21% of GDP in 2019 (not including proceeds
from the December 2019 initial public offering of shares in the national
oil company, Saudi Aramco, which were equivalent to around
4.5% of GDP), down from around 49% of GDP at
the end of 2014.
Meanwhile, SAMA's foreign currency reserves (excluding gold,
SDRs and its position with IMF) were equivalent to around 62% of
GDP and covered more than 29 months of imports of goods and services at
the end of 2019. This is lower than nearly 95% of GDP or
35 months of imports at the end of 2014, but still represent a formidable
buffer buttressing the Saudi riyal's peg to the dollar and sovereign
The A1 rating also takes into account other strengths in Saudi Arabia's
credit profile. Vulnerability to oil price declines, which
is highlighted again by the ongoing shock, is balanced by the sovereign's
very large hydrocarbon reserves and one of the lowest extraction costs
globally, which will support economic resiliency even in a low oil
price environment. Saudi Arabia's proved oil reserves are
expected to last around 70 years at the 2019 rate of production whereas
its natural gas reserves are expected to last around 50 years.
The rating is also supported by effective monetary policy that preserves
the credibility of the exchange rate peg, and financial and macroeconomic
stability. There are also early signs of improving fiscal policy
effectiveness resulting from structural fiscal reforms, including
an enhanced medium-term public finance management framework and
better expenditure monitoring and control after last year's implementation
of the digital Etimad platform for tracking government contracts.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
As a major oil exporter, Saudi Arabia's environmental risks are
predominantly derived from carbon transition. 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 its ESG framework,
given the substantial implications for public health and safety.
Governance risks have a broadly neutral 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
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The negative outlook indicates that an upgrade is unlikely in the near
term. Evidence that the government is likely to be able to contain
the deterioration in its balance sheet and stabilize and ultimately reverse
the debt trajectory through implementation of fiscal consolidation measures
which offset the oil revenue shortfall, possibly supported by a
faster recovery in oil prices, would likely lead Moody's to
change the outlook to stable.
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 Moody's to downgrade the 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 put downward pressure on the rating.
A further significant escalation of regional geopolitical risks that would
threaten Saudi Arabia's oil production and export capacity would
also likely lead Moody's to downgrade the rating.
GDP per capita (PPP basis, US$): 55,730 (2018
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 2.4% (2018 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 2.3%
Gen. Gov. Financial Balance/GDP: -5.9%
(2018 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 9% (2018 Actual) (also known
as External Balance)
External debt/GDP: 19.2% (2018 Actual)
Economic resiliency: a2
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 28 April 2020, a rating committee was called to discuss the rating
of the Saudi Arabia, Government of. The main points raised
during the discussion were: The issuer's economic fundamentals,
including its economic strength, have not materially changed.
The issuer's institutions and governance strength, have not materially
changed. The issuer's fiscal or financial strength, including
its debt profile, has not materially changed.
The local market analyst for this rating is Alexander Perjessy,
+971 (423) 795-48.
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.
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.
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VP - Senior Credit Officer
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