Saudi Arabia, Gulf Neighbors Suffer Ratings Downgrades on Oil Slump
May 15 2016 - 5:41AM
Dow Jones News
By Nicolas Parasie
DUBAI--Saudi Arabia and two of its oil-exporting neighbors in
the Persian Gulf had their debt ratings cut by Moody's Investors
Service, as the slide in crude prices continued to afflict the
region's economies.
The ratings firm over the weekend downgraded Saudi Arabia's
long-term issuer ratings by a notch to A1 from Aa3 but maintained
its stable outlook on the kingdom. Oman's credit rating was reduced
by a notch to Baa1, while Bahrain was cut to Ba2.
The collapse in energy prices from their peaks in the middle of
2014 has hit hard the Gulf economies that rely heavily on the sale
of oil to fund large-scale infrastructure projects to accommodate
their fast-growing populations. Some of these countries have
responded by implementing measures including cutting spending,
raising taxes, reducing subsidies, issuing debt and drawing down
their foreign reserves that they accumulated in recent decades when
oil prices were higher.
In the case of Saudi Arabia, whose economy is the largest in the
Arab world, the country's budget deficit ballooned to nearly $100
billion in 2015 because of the plunge in oil revenues.
Simultaneously, its foreign reserves dropped by more than $155
billion from a peak in 2014 to below $600 billion in March,
according to government data.
Moody's expects those foreign reserves to decline even further
until 2019 to $460 billion. It also estimates the Saudi budget
deficit to average 9.5% of its gross domestic product each year
between 2016 and 2020, a shortfall that will require $324 billion
in financing.
"A combination of lower growth, higher debt levels and smaller
domestic and external buffers leave the Kingdom less well
positioned to weather future shocks," said Moody's.
Saudi Arabia borrowed $10 billion from international banks last
month and is widely expected to issue more debt later this year.
But its strongest response so far to the new economic challenges is
a raft of reforms announced last month, dubbed Vision 2030, aimed
at reducing the country's dependence on oil. The economic overhaul
involves listing part of state-owned energy giant Saudi Arabia Oil
Co., known as Aramco, but also promoting non-oil industries and
making the country more attractive to foreign investors.
Moody's said that without any of those reforms, Saudi Arabia's
financial troubles would continue to intensify. It said the
country's efforts at diversifying its economy, even if only
partially successful, would improve the country's creditworthiness.
At the same time, Moody's said those plans are still at an
embryonic stage and their "impact remains unclear."
Moody's had previously changed its outlook on Saudi Arabia's
banking sector to negative and put the country's credit rating on
review for a potential downgrade. Rival ratings firm Standard &
Poor's preceded Moody's last month by lowering Saudi Arabia's
rating to A-minus, also citing the impact of low oil prices.
Bahrain and Oman don't have the same financial firepower as
their Persian Gulf neighbors. Moody's said Bahrain's
creditworthiness will continue to weaken despite efforts by the
country to reduce spending. In Oman, the government's strategy to
tap international debt markets may trigger more spending cuts or
put pressure on the state's remaining savings.
Separately, Moody's didn't downgrade but assigned a so-called
negative outlook to other Persian Gulf states the United Arab
Emirates, Qatar and Kuwait, also to reflect the impact of low oil
prices.
Write to Nicolas Parasie at nicolas.parasie@wsj.com
(END) Dow Jones Newswires
May 15, 2016 05:26 ET (09:26 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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