Moody’s Downgrades Saudi Arabia to A1

As the price of oil continues to batter the finances of exporting countries, Moody’s downgraded petroleum power house Saudi Arabia, which not long ago was among the most financially stable countries in the world. It downgraded the rating from Aa3 to A1, with a stable outlook.

Moody’s researchers wrote:

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.

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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).

Government economic reforms and security from friction with its neighbors are mentioned as possible avenues of a rating improvement. Ironically, the price of oil is not.