Moody’s downgrades Saudi Arabia’s outlook to ‘negative’ on crash in oil prices

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Rating agency Moody’s cut Saudi Arabia’s outlook to “negative” from “stable” on Friday, citing the risks to the Kingdom’s fiscal strength due to the crash in oil prices.

It, however, affirmed the sovereign credit rating at “A1”, saying the Kingdom’s government still has a “relatively robust, albeit deteriorating” balance sheet, moderate debt level and substantial fiscal and external liquidity buffers.

The agency said that Saudi’s vulnerability to the decline in oil prices was balanced by its very large hydrocarbon reserves and low extraction costs, which support economic resiliency even in an environment of low oil prices.

The price of US oil plunged below zero for the first time ever

“The negative outlook reflects increased downside risks to Saudi Arabia's fiscal strength stemming from the severe shock to global oil demand and prices triggered by the coronavirus pandemic, and from the uncertainty regarding the degree to which the government will be able to offset its oil revenue losses and stabilize its debt burden and assets in the medium term,” Moody’s said.

The agency said Saudi Arabia is facing loss in government revenue and exports due to the drop in oil demand and plummeting prices.

“The government's balance sheet has weakened since the previous oil price shock in 2015-16, notwithstanding some recent improvements in budget execution, leaving the sovereign's credit profile exposed to the further prolonged period of depressed oil prices that the pandemic may usher in.”

Demand for oil plummeted by a third due to lockdowns and business shutdowns amid the coronavirus pandemic.

In an effort to support the crashing oil market, Saudi Arabia, along with OPEC+ countries agreed on April 12 to cut output by an historic 9.7 million barrels per day (bpd), which amounts to 10 percent of global supply.
The production cuts came into effect on May 1st.

Moody’s said: “Based on these oil price assumptions and Saudi Arabia's commitment to cut oil production, Moody's now expects that government revenues will drop by about 33 percent in 2020 and about 25 percent in 2021 relative to 2019, even after accounting for potentially higher dividends from state-owned entities.”

The agency also projected that the fiscal deficit will widen to more than 12 percent of GDP in 2020 and over eight percent of GDP in 2012, in a sharp rise from the 4.5 percent of GDP in 2019.

Saudi Arabia’s Monetary Authority had said on Tuesday that the Kingdom’s central bank foreign reserves fell in March at their fastest rate in at least 20 years and to their lowest since 2011, while it fell into a $9 billion budget deficit in the first quarter due to collapsing oil revenues.

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