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Rating Action:

Moody's changes the outlook on Saudi Arabia's rating to negative, affirms A1 rating

 The document has been translated in other languages

01 May 2020

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 term.

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 framework.

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.

RATINGS RATIONALE

RATIONALE FOR THE CHANGE IN THE OUTLOOK TO NEGATIVE FROM STABLE

SHARP OIL PRICE SHOCK TO INCREASE DEBT AND ERODE SOVEREIGN'S FISCAL BUFFERS

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 in 2020.

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 increased.

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 creditworthiness.

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 entities.

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% (2018 Actual)

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.

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.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

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: 852 3758 1350
Client Service: 852 3551 3077

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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