Fitch downgrades Saudi Arabia over reform doubts

Ratings agency Fitch has downgraded Saudi Arabia's sovereign debt rating to 'A+' from 'AA-' as it expressed major doubts about the government's financial reform programme.

The Saudi deficit surged to 17.3% of GDP in 2016, with the 416bn Saudi riyal up from SAR362bn in 2015 and much higher than the budget target of SAR326bn.

For its 2017 budget, the Saudi government has targeted a deficit of SAR198bn, or 7.7% of GDP, based on the rise in crude oil prices, which are expected to more than offset the effect of OPEC production cuts on government oil revenue, and the absence of further arrears payments.

Fitch forecast that the central government deficit will fall to 9.2% of GDP in 2017 and 7.1% of GDP in 2018, but that general government debt will rise to 14.5% of GDP in 2018.

"The downgrade reflects the continued deterioration of public and external balance sheets, the significantly wider than expected fiscal deficit in 2016 and continued doubts about the extent to which the government's ambitious reform programme can be implemented," Fitch said, also highlighting that the country's geopolitical risks remained high relative to other A-rated sovereigns.

While the government has already cut civil service allowances and hiked utility prices, and made plans to hike regulated energy and water prices, place a levy on expats, bring in a value-added tax from the beginning of 2018, together with the IPO of Saudi Aramco in 2018 as part of an ambitious privatisation agenda, Fitch was highly sceptical.

"These measures will help to contain further balance sheet erosion, but in Fitch's view it is unlikely that they will all be achieved."

In Fitch's view, "the scale of the reform agenda risks overwhelming the government's administrative capacity. In addition, the economy may not be able to absorb rises in administered energy prices, which could severely affect energy-intensive industries, or the planned expat levies, which could undermine large parts of the domestic private sector."

Earlier on Wednesday, it was reported that Aramco has begun the process to hire investment banks to help it with what is likely to be the largest initial public offering ever.

The Kingdom was quick to respond, stressing that Fitch's outlook had moved from negative to stable and that the downgrade was understood to be based upon a quantitative, number-driven analysis.

Finance minister Mohammed Al-Jadaan said “The fundamentals of the Saudi economy remain strong. The Kingdom’s balance sheet remains strong with SAMA’s FX assets estimated at 84% of GDP – the third largest in GDP terms globally. General government assets are considerably above 100% of GDP."

He added that the Vision 2030 reforms had already seen a number of structural measures rolled out, with the goal of decreasing the Kingdom’s fiscal dependence on hydrocarbons and encouraging economic diversification.

"The government has also made progress in enhancing efficiency by reigning in overspending and optimizing expenditure."