When it comes to which countries are leading the pack in the oil sector, Saudi Arabia has always been one of the top producers of oil. Within the last year however, oil prices have declined quite significantly, but Saudi Arabia and similar countries have decided against cutting down the production of oil. In terms of what oil means for Saudi Arabia, it accounts for 80 percent of its revenue because the country is the leading exporter of oil. Bad news though as Saudi Arabia’s credit rating was just cut by Standard & Poor’s, and the reasoning was that the decline in the oil prices is going to lead to the country having an increased budget deficit.
While it might not seem like much, S&P ended up slashing Saudi Arabia’s credit rating to A+, which is down one level, although it is still the fifth-highest in credit rating classification. The country, which is the biggest OPEC producer, is going to have a deficit this year that will increase to 16 percent of the gross domestic product, also known as GDP. Saudi Arabia now has a negative credit outlook because as S&P said in a statement, “the decline in the oil prices is going to make it harder to reverse the fiscal deterioration.”
The financial deficit along with such importance and reliance on the energy revenue means that Saudi Arabia has a lot of public finance vulnerabilities. Steve Hooker, a money manager working at Newfleet said that the credit metrics that are used for oil producers are starting to come under pressure. Newfleet is a company that is based out of Hartford, Connecticut, and this company actually helps oversee the $12.5 billion of debt. Hooker said that this is not a situation that is going to reverse itself until we see an increase in oil prices, and right now it is not known when that will happen.
Brent crude has seen a 27 percent dive since it peaked back in May, and this is all because there is a global supply glut, with many companies not cutting back on the amounts of oil they produce in a day, even after making job cuts throughout the energy sector. Even though things might be looking a little grim for Saudi Arabia, the country still has the world’s lowest public debt. In fact, the gross debt-to-GDP ratio for Saudi Arabia is less than 2 percent, according to 2014 figures, and this is really good.
The Finance Ministry for Saudi Arabia said that it disagreed strongly with the assessment from S&P, and did not agree with how it approached the ratings management in this specific instance. The Finance Ministry for Saudi Arabia said on the Saudi Press Agency website, which is a state-run media, that the downgrade was due to fluid market factors and not changes in the fundamentals of the sovereign.
Trevor Cullinan, a credit analyst at S&P said that the credit rating for Saudi Arabia could go even lower within the next two years, especially if the country does not achieve a reduction in the government deficit or if the liquid financial assets fall below 100 percent of the GDP. Saudi Arabia is rated by Moody’s Investors Service too, with Moody’s giving the country an Aa3 rating, and this is one level above the grade by S&P. S&P has already rated Ireland, Bermuda, Israel, and Slovakia with the same credit rating of A+ as well.
Interestingly enough, Saudi Arabia just relaxed the rules in June which allows qualified investors to access the stocks directly as an effort by the government to try to reduce the dependence on crude oil. This past June was the first time that Saudi Arabia opened the stock market to foreigners, even though the Saudi Arabian stock market is the largest in the Arab world. The high for this year came in April, but since then the Tadawul All Share Index has fallen 28 percent, which is partially due to the decrease in oil prices. In 2016, the S&P has already predicted the general government deficit of Saudi Arabia to go down to 10 percent, then 8 percent in 2017.