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Rating Action:

Moody's downgrades Saudi Arabia's government issuer rating to A1 with stable outlook, concluding review for downgrade

14 May 2016

Frankfurt am Main, May 14, 2016 -- Moody's Investors Service has today downgraded the Government of Saudi Arabia's long-term issuer ratings to A1 from Aa3 and assigned a stable outlook. Today's rating action concludes the review for downgrade which Moody's initiated on 4 March 2016.

The downgrade of Saudi Arabia's rating reflects Moody's view that lower oil prices have led to a material deterioration in Saudi Arabia's credit profile. A combination of lower growth, higher debt levels and smaller domestic and external buffers leave the Kingdom less well positioned to weather future shocks.

The stable outlook indicates that, at this lower rating level, risks are broadly balanced. In the absence of further fiscal and economic reform, the pressures on the government's balance sheet would continue to rise. However, the government has ambitious and comprehensive plans to diversify both the economy and its balance sheet which, if even partly successful, should stabilize its credit profile and which could, if achieved, offer a route back to a higher rating level over time.

As part of today's rating action, Moody's has also lowered Saudi Arabia's long-term foreign-currency bond and deposit ceilings to A1 from Aa3, whereas the short-term ceilings remain at Prime-1. Saudi Arabia's long-term local-currency country risk ceilings were also lowered to A1 from Aa3.

RATINGS RATIONALE

RATIONALE FOR THE DOWNGRADE TO A1

Saudi Arabia's credit profile remains very strong by comparison with the majority of Moody's-rated sovereigns. However, the drop in oil prices from their mid-2014 peaks has materially undermined the Kingdom's credit profile, negatively affecting the economy, the government's finances as well as both external accounts and reserve buffers. While the government has ambitious and comprehensive plans to address the shock by diversifying its economic and fiscal base, those plans are at an early stage of development and their impact remains uncertain.

Nominal GDP has dropped by 13.3% in 2015, and Moody's expects another 5% reduction in 2016. In line with the anticipated gradual recovery of oil prices, nominal GDP should reach its pre-oil price shock level by 2019. Due to fiscal consolidation in the form of streamlined government spending, Moody's expects real GDP growth to drop to 1.2% in 2016 from 3.4% in 2015. Over the coming five years, growth will average 2%, much lower than the 5% annual average recorded in 2011 to 2015.

Government finances have deteriorated significantly. According to Moody's estimates, the general government fiscal balance recorded a deficit of 14.9% of GDP in 2015, following a deficit of 2.3% in 2014, and the rating agency expects a similarly-sized deficit this year. Although the fiscal balance will improve gradually over the coming four years, Moody's expects an average deficit of 9.5% of GDP between 2016 and 2020, requiring cumulative financing of SAR1.2 trillion ($324 billion or almost 50% of estimated nominal GDP in 2015).

It is not yet clear how this cumulative financing need will be met: while Saudi Arabia's low levels of government debt at 5.8% of GDP in 2015 provide fiscal space, no medium-term funding strategy has yet been announced. Under Moody's baseline scenario, which assumes that fiscal deficits will be 100% financed by debt issuance from 2017, general government debt would rise to more than 35% of GDP by 2018, and continue to climb thereafter beyond the Aa3-rated median of less than 30%.

Saudi Arabia's buffers will continue to erode. Following a peak of $731 billion in August 2014, foreign exchange reserves have dropped by almost $155 billion to $576 billion as of March. The oil price shock has led to a marked deterioration in Saudi Arabia's external current account balance, which fell to a deficit of 8.2% of GDP in 2015, from a surplus of 9.8% in 2014. Moody's expects the current account deficit to widen further to almost 12% of GDP this year, before gradually improving in the following years. While inflows in the financial account will pick up on the back of increased external debt issuance, Moody's projects further balance-of-payments deficits, and expects foreign exchange reserves to decline further until 2019, reaching around $460 billion.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook indicates that, at this lower rating level, risks to Saudi Arabia's credit profile are broadly balanced. In the absence of further fiscal and economic reform, the pressures on the government's balance sheet would continue to rise, although this is not currently Moody's expected outcome.

Set against that, the government has announced a comprehensive and ambitious reform plan, called The National Vision 2030, which aims to reduce the economic and fiscal dependency on oil. Implementation over the first five years will be guided by the National Transformation Plan 2016-2020.

In Moody's opinion, the plan faces a number of challenges, reflecting for example the tension between the desire to sustain economic growth and job creation, and fiscal consolidation measures. The institutional changes needed to stimulate, inter alia, the desired private-sector growth, increased labour force participation by Saudi nationals, higher levels of educational attainment and increased private investment in both large corporate and SME sectors will be quite profound. The fiscal reforms needed to broaden the Kingdom's revenue base raise significant social stability considerations, exacerbated by the fact that per capita incomes in Saudi Arabia are lower than they are among higher rated peers.

However, even if partially implemented, the plan should sustain Saudi Arabia's credit profile at its current level. Implementation which achieved the broader vision underlying the plan would materially change the Kingdom's economic and fiscal profile, and demonstrate institutional strengths that have not been evident in the past. While their attainment is too uncertain to do so now, in Moody's view such developments could, over time, support improvements in the Kingdom's credit profile that are consistent with a higher rating.

The low external vulnerability risks represent a further factor supporting Moody's stable outlook for Saudi Arabia's A1 rating. At only 15% of GDP in 2015, total external debt is very low and, despite the envisaged increased external borrowing by the government, total external debt levels will increase to only 30% of GDP by 2018 and about 40% by 2020. Given these low external debt levels and the residual strength in Saudi Arabia's foreign exchange reserves, the country's external vulnerability indicator, which compares short-term external debt service obligations to available foreign exchange reserves will remain far below the important threshold of 100%. Saudi Arabia will maintain a strongly positive net asset international investment position of around 50% of GDP by 2019, although this will be much lower than the 108% recorded in 2015.

WHAT COULD MOVE THE RATING UP/DOWN

The stable outlook reflects Moody's view that upside and downside risks are balanced. However, fulsome implementation of planned fiscal and economic reforms would be credit positive and could support a higher rating. The success of such reforms would likely be reflected in deficits falling more quickly than currently envisaged, the debt burden peaking at a lower level and growth recovering earlier and more rapidly from a broadening economic base. Such developments would be more positive if they resulted from sustainable structural reforms than from cyclical or temporary increases on the price of oil. A reduction in regional political and security threats would also exert upward pressure on the rating.

Conversely, any signs or combination of the following factors would be credit negative, and could lead to a negative rating outlook or downgrade: loosening fiscal consolidation, such as fiscal deficits staying wide at more than 10% of GDP over the coming two years; government debt ratios rising faster than in Moody's baseline scenario and approaching 50% of GDP by 2018; renewed pressure on the exchange rate and a faster depletion of foreign exchange reserves; signs of difficulties to fund large fiscal and current account deficits in 2016 and 2017; an escalation of regional geopolitical risks and/or signs of deteriorating domestic political and social stability.

Prompted by the factors described above, the publication of this credit rating action occurs on a date that deviates from the previously scheduled release date in the sovereign release calendar, published on www.moodys.com.

GDP per capita (PPP basis, US$): 53,624 (2015 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 3.5% (2015 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 2.3% (2015 Actual)

Gen. Gov. Financial Balance/GDP: -15% (2015 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -8.2% (2015 Actual) (also known as External Balance)

External debt/GDP: 15.1% (2015 Estimate)

Level of economic development: High level of economic resilience

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

On 10 May 2016, 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 institutional strength/ framework, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has decreased. The issuer's susceptibility to event risks has not materially changed. An analysis of this issuer, relative to its peers, indicates that a repositioning of its rating would be appropriate.

The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2015. Please see the Ratings 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 ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

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

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.

Steffen Dyck
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Anne Van Praagh
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades Saudi Arabia's government issuer rating to A1 with stable outlook, concluding review for downgrade
No Related Data.
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