Does Saudi Arabia's Recent Credit Rating Downgrade Have Investors Worried? 2

Rating downgrade

Ratings major Fitch slashed the long-term foreign and local currency ratings of Saudi Arabia by one notch to A+ from AA- on March 22 on worries that the kingdom may be struggle to implement its Vision 2030 aimed at doing away with its oil dependence. The outlook was changed to ‘stable’ from ‘negative.’

The downgrade reflects “the continued deterioration of public and external balance sheets, the significantly wider than expected fiscal deficit in 2016 and continued doubts about the extent to which the government’s ambitious reform program can be implemented,” Fitch said.

This rating action from Fitch follows a reduction effected in 2016 citing lower oil prices. Moody’s has the country at A1 while S&P Global Ratings has it at A-.

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Public finances remain of concern

Fitch noted that Saudi Arabia saw its budget deficit rise to 17.3% of GDP (gross domestic product) in 2016. Meanwhile, the country’s net foreign assets, as reported by the Saudi Arabian Monetary Authority, declined by $49.5 billion between June 2016 and January 2017.

The crude oil production cut agreed upon by Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC countries – aimed at pushing up oil prices – will benefit Saudi Arabia in shoring up its finances.

The country has also tapped international debt markets in the recent past. Its $17.5 billion bond sale in 2016 remains the largest issue by an emerging market. Moody’s expects the kingdom to issue another $12.5 billion this year.

Though Fitch was positive on the country’s economic reforms restricting the widening deficits, it was not convinced that all of the reforms would be achieved.

Should you be worried?

For investors, it is important to note that the Fitch downgrade was expected. There is a lot of investor interest in the proposed Saudi Aramco IPO and global debt markets lapped up the country’s bonds.

In a latest development, the Saudi government has reduced Saudi Aramco’s tax rate from 85% to 50%. Bloomberg reported that according to Sanford C. Bernstein & Co., this move could boost Aramco’s post-tax income by 300% and push the market value of the company from $1 trillion to $1.5 trillion.

As far as equities are concerned, the iShares MSCI Saudi Arabia Capped ETF (KSA), the only ETF investing exclusively in stocks from the country and available to US investors, has been down for this year so far. However, unlike the Saudi economy, the KSA is already diversified.

The energy sector forms only 0.6% of the ETF. It is dominated by financials and materials, which form a combined 70% of the fund.

Increased business ties across Asia and the rest of the world would not only benefit the image of the country, it would also help Saudi companies expand the scope of their business and get ready for fulfilling Vision 2030.

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