02/04/2015 04:50 AST
The confirmation by Moody's of Saudi Arabia's rating is a testament to the Kingdom’s solid financial standing, says a top economist.
“There is nothing to be concerned over the short term,” John Sfakianakis, Middle East director at Ashmore Group, told Arab News.
His remarks came as Moody's Investors Service affirmed Saudi Arabia's Aa3 long-term issuer rating and maintained a stable outlook on the rating.
“This reflects the Kingdom's ample financial assets, which will allow it to weather a period of lower oil revenues and maintain a fiscal profile compatible with the current rating,” said the Moody’s statement.
John added: “The country's balance sheet is very good despite the decline in oil revenues by nearly half over the last few months. The oil price is on a recovery path above $60 a barrel as signs of a US decline in output is actually happening. Other than US volumes, the focus is now on Iran talks and Yemen.”
Commenting on Moody’s announcement, Fawaz Alfawaz, an economic consultant, told Arab News: “The affirmation of the rating comes as no surprise, really.”
Alfawaz said: “There are not many countries with reserves that are about the three times the size of the budget not to mention the room to reduce the budgetary outlays. Large portions of the budget over the Last few years are for major expansions in infrastructure which would allow the government to reduce the expenditures in about three years time.”
Moody’s rating statement also said long-term and short-term country ceilings for bonds and for bank deposits for Saudi Arabia are unaffected by this rating action and remain at Aa3/P-1.
Saudi Arabia's Aa3 rating retains a stable outlook because the government's very substantial financial resources and low indebtedness indicate that the Kingdom's financial strength will remain solid over the coming years, outweighing the negative impact of the recent fall in oil prices. Saudi Arabia has very substantial financial resources that can support a period of fiscal deficits.
In addition, the government's very low level of debt, at 1.6 percent of GDP at the end of 2014, allows it the flexibility of issuing domestic debt to finance its deficits in the next one or two years. Moody's expects that the financing of the government deficits in the coming two years will come from a combination of debt issuance and drawing down of financial assets. However, while the ratio of government debt to GDP is therefore likely to rise over that period, Moody's expects it to remain very low in comparison to other similarly rated sovereigns and to not pose credit concerns.
Moody's expects that, after a deficit of about 0.6 percent of GDP in 2014, the government's budget deficit will increase to 12 percent or more during 2015, mainly the result of the steep fall in oil prices that has occurred during the last half year.
Approximately 87 percent of government revenues came from oil in 2014. However, the Saudi Arabian Monetary Agency has foreign exchange reserves equivalent to about 100 percent of GDP, as well as considerable domestic financial assets.
As a result, the financing of even a fairly large budget deficit should not weaken the government's financial strength in the near term. Even if oil prices were to remain at current levels for the next two years, the government's financial resources would still be substantial, enabling it to finance deficits without a major increase in government debt.
Looking further ahead, the agency's outlook for a rise in oil prices over the next several years suggests that the kingdom's finances will remain compatible with its Aa3 rating.
Moody's base case is for oil prices to gradually rise, reaching close to $80 per barrel by 2018.
This scenario would imply a gradual reduction in Saudi Arabia's budget deficits over the next few years back to single-digit levels as a percentage of GDP.
Arab News
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