Distinguished American business and financial services company Moody’s (Moody’s Corporation) Investors Service has downgraded Saudi Arabia’s outlook to outlook to negative from stable citing exhausting financial resources and vulnerability of the kingdom’s finances exposed by the recent oil price drop.
The rating company retained the country at A1, its fifth-highest grade, according to a statement on Friday. Moody’s last downgraded Saudi Arabia in 2016, and now has its assessment above those of Fitch Ratings and S&P Global Ratings.
“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”
Troubled by the effects of coronavirus and collapsing oil prices, Saudi Arabia is headed for a recession this year while frequently drawing down its savings. In March alone, the central bank’s net foreign assets fell by more than 5%, or more than 100 billion riyals ($27 billion).
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The government is looking to its largest-ever debt program to keep the exhaustion of reserves at up to 120 billion riyals, as originally planned in the budget. Finance Minister Mohammed Al-Jadaan has also laid out plans to scale back spending after already cutting 50 billion riyals in expenses.
The widening fiscal deficit
Moody’s outlines that Saudi’s fiscal deficit will increase 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 make government debt to rise to around 38% of GDP by the end of 2021 from less than 23% of GDP in 2019, according to the statement.
The price of Brent crude has fallen more than 50% in March and has fallen further since then. It’s now trading around $25 a barrel – far short of the $76.1 the International Monetary Fund estimates when Saudi Arabia would need to adjust its budget. Assuming a base case scenario of Brent averaging $35 and Saudi Arabia implementing further spending cuts this year, its fiscal deficit could extend to just under 15% of GDP.
