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Saudi Arabia hit by new credit rating downgrade

By JT - May 14,2016 - Last updated at May 14,2016

A Saudi Aramco car with visiting journalists is seen outside the company's liquid natural gas plant in Saudi Arabia's remote Empty Quarter, near the United Arab Emirates, on Tuesday (AFP photo)

AMMAN — Saudi Arabia suffered another cut to its credit rating on Saturday as Moody’s Investors Service downgraded the kingdom, along with Bahrain and Oman because of the slump in oil prices, according to the Agence France-Presse (AFP).

Moody’s has lowered its long-term rating for Saudi Arabia to A1, which denotes low credit risk, down from Aa3, saying lower energy prices have adversely affected the profile of the top oil exporter, the AFP reported.

Meanwhile, Moody’s raised the rating for Ireland’s sovereign debt by one notch to A3 from Baa1, adding that the outlook on the long-term rating remains “positive”.

Furthermore, Moody’s cut Poland’s outlook from stable to negative over “fiscal risks” posed by its right-wing government, but left its investment grade unchanged.

Today’s rating actions concludes the rating review for downgrade that Moody’s initiated on March 4, 2016.

With regard to Saudi Arabia, “a combination of lower growth, higher debt levels and smaller domestic and external buffers leave the kingdom less well positioned to weather future shocks”, the AFP noted.

However, ambitious plans announced by Riyadh to diversify its economy could lead to a credit rating upgrade in the future, Moody’s said, as cited by the AFP.

Fellow agencies Standard and Poor’s and Fitch have also downgraded Saudi Arabia in recent months, according to the AFP.

Crude oil price collapse, from above $100 in early 2014 to around $46 on Friday, has intensified Saudi efforts to diversify the economy away from oil which makes up the majority of its revenue.

The ratings agency has also lowered its rating for Bahrain to Ba2, which indicates substantial credit risk, from Ba1, with a negative outlook.

The main driver for the rating downgrade is Moody’s view that the credit profile of the Bahraini government will continue to weaken materially in the coming years, despite its fiscal consolidation efforts, according to Moody’s website.

In particular, the rating agency expects Bahrain’s government debt burden and debt affordability to deteriorate significantly over the coming two to three years.

Moody’s lowered its rating for Oman to Baa1, which denotes moderate credit risk, from A3, warning the Sultanate was “vulnerable to an oil price shock” given its heavy reliance on energy revenues.

Meanwhile, Moody’s Investors Service confirmed the Aa2 long-term issuer ratings of the UAE, and assigned a negative outlook. 

Moody’s negative outlook to the rating reflects the lack of clarity around the formulation and implementation of government policies to reverse the large deficits and the deterioration in the net asset position, according to Moody’s.

These have been created by lower oil prices, in the absence of which the UAE’s fiscal buffers will erode over time, exerting downward pressure on the rating, according to the global ratings agency.

Moody’s has also confirmed Kuwait’s Aa2 government issuer rating and has assigned it a  negative outlook

The decision to confirm Kuwait’s rating reflects Moody’s assessment that the negative impact of the low oil price is manageable because of Kuwait’s robust government balance sheet, characterised by low levels of government debt and large domestic and external assets.

This is in addition to Kuwait’s high per capita wealth; and its low fiscal and external breakeven oil prices, which limit the deterioration in fiscal and current account balances. 

In addition, Kuwait has extraordinarily large hydrocarbon reserves at very low production costs. 

As a result, Moody’s expects that Kuwait’s economic and fiscal strength are likely to remain consistent with an Aa2 rating.

With regard to Ireland, Moody’s cited confidence in the eurozone member’s ability to further cut its deficit after finally forming a government.

While a UK exit from the EU would have negative repercussions on Ireland, given the close economic ties, the risk would be manageable for the Irish economy, Moody’s said in a statement.

As for Poland’s outlook, Moody’s change in this regard was the first in over a decade and comes after a deeper ratings cut in January by Standard and Poor’s, which blamed the government led by the Law and Justice Party for “weakening institutions”.

Moody’s, however, said it would keep Poland’s foreign debt grade at A2, reflecting “the country’s economic resilience”.

Poland has a large, diversified economy that has shown robust real gross domestic product growth in recent years, despite being exposed to significant external headwinds at the time of the global financial and euro area debt crises, Moody’s reported. 

 

Poland’s finance ministry welcomed the unchanged rating following market speculation about another downgrade.

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