• The US’ Standard & Poor’s downgrades Saudi Arabia’s sovereign debt, with a negative outlook
  • It based the decision on the huge swing from fiscal surpluses to double-digit deficits
  • Saudi Arabia’s foreign minister Adel al-Jubeir called the ratings action “reactionary” and claimed the fiscal deficit was “manageable”

US-based Standard & Poor’s Ratings Services (S&P) has downgraded Saudi Arabia’s sovereign rating from A+/A-1 to AA-/A-1+ with a negative outlook.

S&P ratings for Saudi Arabia are now unsolicited, as Saudi Foreign Minister Adel al-Jubeir described the rating as “reactionary,” according to Reuters.

S&P cited a “pronounced negative swing in Saudi Arabia’s fiscal balance” for the ratings cut. Riyadh has shifted from a surplus averaging 13 per cent of GDP between 2003 and 2013 to a 16 per cent of GDP deficit in 2015.

The ratings agency also pointed out the high dependence on hydrocarbons, which make up 80 per cent of government revenues. It highlighted the inflexible current spending, dominated by public sector wages and subsidies.

The move comes after the US’ Moody’s Investors Services predicted a 14 per cent drop in the kingdom’s nominal GDP in 2015.

S&P projects budget deficits of:

  • 10 per cent of GDP in 2016,
  • 8 per cent in 2017 and
  • 5 per cent in 2018.

However, Saudi Arabia is starting from a strong position, with net government assets of 123 per cent of GDP. S&P expects the assets to fall to 79 per cent of GDP by 2018.

Riyadh sees the deficit as less worrying for the kingdom’s fiscal health.

“In Saudi Arabia we are at the tail end of huge infrastructure development programme in terms of airports, roads, hospitals, highways, housing and so forth and so there was a lot of spending,” al-Jubeir told reporters in Bahrain. “Over the past 12 years we accumulated huge financial reserves.”

S&P’s assumptions are based on splitting deficit financing between reserves and assets, and increasing debt by 6 percentage points of GDP a year. The agency also expects capital spending cuts, possible subsidy reforms and a tax on undeveloped land in urban areas.

The IMF recently stated that Saudi Arabia would run through foreign reserves in under five years, given to debt issuance, and minor budget consolidation and rises in the oil price.

But Saudi Arabia has very low debt, so it can issue bonds regularly to finance deficits.

“We have the lowest debt to GDP ratio of any Gulf country,” al-Jubeir was reported as saying. “We have a large population but our deficits this year are manageable.”

S&P envisages a further downgrade in the next two years, if liquid assets decline faster than expected.

The kingdom closed its accounts early and froze public sector wages and contract awards to contain its 2015 deficit. Contract awards are expected to be significantly down on 2014 levels, and concerns over slowing GDP growth are increasing. S&P is projecting GDP growth of 2.5 per cent in 2016, then 3 per cent until 2018.

Learn more about Saudi Arabia’s infrastructure spending at Saudi Mega Projects Summit