The sovereign’s risk score has fallen in recent days as lower oil prices add to the Kingdom’s existing economic, political and structural weaknesses.
Shedding almost half a risk point this past week, with the price of oil plunging to around $60/barrel, Saudi Arabia, now lying 33rd in Euromoney Country Risk’s (ECR) global rankings on a score of 65.1 from a maximum 100 points, is in danger of falling into the third of ECR’s five tiered groups.
ECR ranks 186 sovereigns into five broad categories, ranging from tier one (the world’s safest credits) to tier five (those most at risk of, or indeed already in, default).
Saudi Arabia is rated AA by Fitch, Aa3 by Moody’s and AA- by Standard & Poor’s, but these assessments lag the sharply falling price of oil now affecting the country’s future spending plans, and ECR’s tier three is synonymous with a BB+ to A- rating.
Saudi Arabia was already struggling to convince experts of its merits before the oil price fall, scoring lowly for a range of risk indicators, mostly political ones – including corruption, transparency, its institutions, and regulatory and policy environment.
These risk factors rack up less than half the 10 points available, which has put the sovereign on a moderately declining long-term score trend since (and even before) the 2008 global crisis.
“Saudi FX reserves are high [at more than $770 billion, or around 100% of GDP] and it has surplus slush funds so it can run up a deficit and keep spending over the next few years”, says James Reeve, deputy chief economist with Samba Financial Group.
“Still, unlike a developed economy, which can run-up huge fiscal deficits and debt, Saudi Arabia is a relatively undiversified economy and is hostage to the oil price.”
The country has a higher break-even for its budget than, say, Qatar or the United Arab Emirates, and the economy will undoubtedly take a hit the longer low oil prices carry on.
Forecasts published in November by Samba Financial Group (before the recent Opec meeting) show Saudi GDP growth decelerating from 4.5% this year to 3.3% in 2015 and 2.9% in 2016. The Kingdom’s current-account surplus more than halves next year to 6.4% of GDP before easing to 5% in 2016, and the fiscal surplus is eradicated, generating deficits above 8% in both years.
These forecasts were based on oil prices of $85 and $90 per barrel respectively for each year, which if adjusted further downwards would see even graver fiscal-macro projections heightening Saudi’s moderate risk.
The financial position is comfortable, for now, with projects to expand Mecca and Medina, and complete the Riyadh metro unaffected.
Yet some financial stresses could emerge, notably in the dollar/riyal forward market, necessitating a response from the Saudi Arabian Monetary Agency.
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