Saudi’s credit rating downgrade is severe blow to its economy

Fitch cut the Kingdom’s credit rating by one notch from “A +” to “A”, a severe blow to its economy as it carries an increase in the cost of borrowing on the Kingdom from international markets.

The move is compounded by the fact that the kingdom is preparing for a possible international issuance of dollar-denominated Islamic bonds. The report attributed the reason for the downgrade to the escalation of geopolitical and military tensions in the Gulf region and the deterioration of the Kingdom’s financial position.

Fitch has not ruled out further attacks on the kingdom, which could result in economic damage. “In our view, Saudi Arabia is vulnerable to mounting geopolitical tensions due to its prominent position in foreign policy, including its association with US policy on Iran and its continued involvement in the Yemen war,” the agency said.

This comes despite the resumption of full oil production at the end of September this month following an attack by drones on two oil facilities in Abqaiq and Khurais on the fourteenth of this month, and caused the suspension of production of 5.7 million barrels per day, which represents half of the Kingdom’s production.

In response to the Fitch report, the Ministry of Finance in the Saudi regime expressed reservations and called on the agency to reconsider.

The ministry said that the province of Saudi Arabia and major Saudi companies at advanced levels in the global rankings demonstrate the effectiveness of the measures taken by the country to promote economic growth.

The report does not reflect the implications of Saudi Arabia’s rapid response in dealing with the aftermath of the attack on the two oil facilities.

Fitch forecast a fiscal deficit of 6.7% of GDP this year due to fiscal policy and falling oil prices, compared with a deficit of 5.9% last year.

The agency expected oil prices to fall to an average of $ 65 a barrel this year, and to $ 62.5 next year.

Fitch said that the expected drop represents a headwind for the fiscal balance program through which the Saudi government aims to achieve fiscal balance in 2023.

Riyadh has posted a fiscal deficit in recent fiscal years of more than $ 300 billion, according to government figures, and the Saudi government expects a deficit of about $ 34 billion in the 2019 budget.

Although Fitch downgraded Saudi Arabia, it is one notch higher than Saudi Arabia’s S&P credit rating.

Observers believe that the downgrade of the Kingdom’s credit rating will weaken its ability to borrow from abroad and make it less reliable towards banks and lenders globally compared to the previous period.

The door is still open to further cuts in the event of strikes or military expansion in the region, and Saudi companies and banks will be affected by the downgrade of the Kingdom’s credit rating if requested loans from banks and international institutions.

The kingdom’s economy grew 0.5 percent in the second quarter from a year earlier, driven by cuts in oil production, official data showed.

Government data showed that the GDP of the oil sector fell 3.02% in the second quarter, while the non-oil sector grew 2.94%.

A few days ago, S&P predicted the kingdom’s real GDP would shrink by about 0.4 percent this year, driven mainly by lower oil production due to the OPEC deal and attacks.

S&P confirmed the kingdom’s long-term and short-term sovereign debt rating of “A / A-” (-A- / AA). By the end of 2019, the kingdom plans to reach its existing debt to about $ 181 billion, equivalent to 21.7% of GDP.