Saudi Arabia Outlook Cut by Fitch to Negative

Saudi Arabia’s outlook was cut from stable to negative by Fitch Ratings. The COVID-19 pandemic and lower oil prices thrashed the kingdom’s finances.

A negative outlook means the succeeding move on its credit rating may be a downgrade. It can go further down to the lowest level. This is since Fitch began assessing the kingdom in 2004. 

The sovereign is still at A, which is its sixth highest rating. It is on par with Japan and Iceland, according to a statement on Monday.

Fitch’s last downgrade on Saudi Arabia was in 2019. It had its assessment one notch above S&P Global Ratings. And, it was one level lower than Moody’s Investors Service.

The revision for the country reflects the continued weakening of Saudi Arabia’s fiscal and external balance sheets. That which has been accelerated by the coronavirus pandemic and lower oil prices. Moreover,  despite the government’s strong commitment to fiscal consolidation, said Fitch analysts including Krisjanis Krustins.

The country’s Ministry of Finance has focused on the ratings affirmation. It said, despite the negative outlook, the kingdom’s ratings have demonstrated notable resilience. That’s with three consecutive rating affirmations by three major credit rating agencies since the onset of the March 2020 crisis.

Saudi Arabia, the Arab world’s largest economy is headed for a contraction this year. It was amid a collapse in oil prices and the spread of the coronavirus pandemic. The country’s budget shortfall is calculated to widen to 12.8% of gross domestic product from 4.5% in 2019.

On Monday, Saudi Arabia’s dollar bonds were stronger. The prospect of a U.S. presidency under Democrat Joe Biden bolstered demand for risky assets. The yield on the kingdom’s security due 2055 dropped 6 basis points to 3.16%.

More from Fitch Ratings

According to Fitch, government debt will reach 35% of GDP by the end of 2020. Moreover, 41% by 2022, from 23% of last year’s.

Fitch says debt issuance and reserve drawdowns will drive down sovereign net foreign assets to 60% of GDP by 2022. That will be from about 72% in 2019-2020.

Furthermore, fiscal deficits will narrow to about 8% of GDP in 2021 and 5% in the following year. This is assuming Brent crude recovers to an average $50 per barrel by 2022. Also, if Saudi oil production grows to 9.7 million barrels a day.

Government reserves, including central bank deposits, are seen falling to 16% of GDP this year and 12% of GDP in 2022.