Saudi Arabia cut to ‘A+’ by S&P; outlook remains negative

Saudi Arabia's credit rating was cut on Friday by Standard and Poor’s Rating Services, citing low oil prices and a noticeably negative swing in the kingdom’s fiscal deficit.

The kingdom's unsolicited long and short-term foreign and local currency sovereign credit ratings were slashed to "A+/A-1" from "AA-/A-1+."

In the past 10 years to 2013, Saudi Arabia recorded fiscal surpluses at 13 percent of GDP. The size of its swing in 2015 to 16 percent of GDP from a deficit of 1.5 percent in 2014 and a surplus of 7 percent in 2014, coupled with its reliance on oil revenues and current expenditures, have all pointed to weaknesses in its budget.

Without a rebound in oil prices, S&P foresees a government deficit of 10 percent of GDP in 2016, eight percent in 2017, and five percent in 2018, based on the kingdom’s planned cost-cutting measures.

“We could lower the ratings within the next two years if the government did not achieve a sizable and sustained reduction in the general government deficit or its liquid fiscal financial assets fell below 100 percent of GDP,” the ratings agency added.

Meanwhile, the kingdom’s monetary policy continues to remain inflexible due to its riyal peg to the US dollar, S&P added. Although this strategy has helped stabilize its population’s inflation expectations, it binds the kingdom’s monetary policy to the US Federal Reserve.

“Notwithstanding the limited monetary flexibility, we regard the Saudi financial system as strong,” S&P said. “We classify the banking sector of Saudi Arabia in group '2' under our Banking Industry Country Risk Assessment methodology, with '1' being the strongest ranking and '10' the weakest.”

The ratings agency, however, pointed out that it remains “challenging” to predict Saudi Arabia’s policy changes due to the fact that it is a monarchy.

Although two new councils— the Council for Political and Security Affairs and the Council for Economic and Development Affairs— have been recently created to establish a more efficient government policy, the king must still approve final decisions.

Lately, some powers have been decentralized to the crown prince and deputy crown prince, who respectively head these two bodies.

“Broader institutional checks and balances are still at early stages of development,” S&P said.