Moody's: Kingdom's economic strength is 'very high'

Updated 02 November 2015
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Moody's: Kingdom's economic strength is 'very high'

JEDDAH: Saudi Arabia's Aa3 foreign and local-currency government bond ratings and stable outlook are supported by its vast hydrocarbon resources, high per capita income, and strong but deteriorating fiscal position. Strong growth in oil revenues in the past several years generated very large fiscal surpluses through 2013, allowing the government to build a sizable asset cushion and sharply reduce its debt ratios to levels much lower than rating peers, according to a report by Moody’s released on Monday.
Starting in 2014, however, the government started recording budget deficits, and this is likely to continue for several years. The government is once more issuing debt as well as running down its financial assets. Other credit challenges are mainly institutional. World Bank governance indicators place Saudi Arabia lower than most of its peers, although financial sector supervision by the Saudi Arabian Monetary Agency (SAMA) proved effective through the global financial crisis, and the banking system remains strongly capitalized.
Downside risks to the stable outlook relate to the economy’s exposure to commodity cycles and price shocks. A longer period of low oil prices, particularly if this were to be accompanied by policy choices that led to a steeper increase in debt or a sharper diminution of financial assets, would have a negative impact on Saudi Arabia's credit profile. Our baseline scenario for the government’s fiscal position shows continuing fairly large deficits, with a resultant material decline in financial assets and a quite substantial build-up of debt, albeit from a low level. If this trend is not moderated, downward pressure on the rating will build up over the coming years.
The strength of the government’s financial position before oil prices began their decline in mid- 2014 provides a strong buffer that allows the government to easily finance its large budget deficits without seriously undermining its fiscal strength in the near term. However, if oil prices continue at their current, relatively low level over the medium term and the government does not implement further measures to reduce budget deficits through spending cuts or revenue increases, the weakening of the government’s finances would affect assessment of fiscal strength. The stable outlook on the rating reflects our current expectation that sufficient measures to address the deficit will ultimately be forthcoming.
“We assess Saudi Arabia’s economic strength as “Very High,” supported by a track record of strong growth, high wealth levels, and large hydrocarbon reserves. Other countries who score similarly for economic strength include Germany (Aaa stable), Japan (A1 stable) and Qatar (Aa2 stable), among others,” Moody’s said.
Saudi Arabia’s real GDP growth has averaged 5.5 percent over the last decade, supported by the country’s natural resource wealth. Since 2014, however, the country has entered a period of slower growth as a result of lower oil prices and their effect on government finance and economic activity generally. Saudi Arabia’s proven oil and gas reserves were approximately 321 billion barrels of oil equivalent in 2014, the third largest in the world. At the current rate of production, its proven hydrocarbon reserves would last approximately 65 years, lower than most regional oil producing peers but higher than GCC peers Oman (A1 negative) and Bahrain (Baa3 negative).


Pakistan rupee set to come under more pressure

Updated 28 min 17 sec ago
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Pakistan rupee set to come under more pressure

  • Exchange companies are required to maintain record of all buy and sell transactions equivalent to $500
  • Dollar supply declines from $3m per day to only $1m as buyer and seller decline to share identification data

KARACHI: The Pakistan rupee could face further pressure this week, in the midst of the country’s chronic foreign currency shortage and speculation of a third currency devaluation, analysts said.
The currency, which has been exposed to rising external financing requirements and lower remittances, touched 119.05 rupees to the dollar on Friday, closing at 118.70 rupees to the dollar on Saturday in the open market.
“People think that in coming days the rupee would be further under pressure due to increasing demand for the dollar so they start buying anticipating a dollar shortage,” Zeeshan Afzal, executive director-research at Insight Securities, told Arab News.
“Perception and real need (demand) drives the currency exchange market in both ways,” he said.
The rupee has been impacted by Pakistan’s historic high current account deficit of $14 billion that has widened because of increasing imports, insufficient exports and workers’ remittances.
“In Ramadan, the inflow of remittances has declined, demand for dollar from those going for Umrah has increased,” Muzamil Aslam, senior economist and CEO of EFG-Hermes Pakistan told Arab News.
Ratings agency Moody’s Investors Service last week forecast that the rupee could weaken to 125 to the dollar by June of next year.
The country’s central bank has already let the currency decline by 10 percent against the dollar in the past six months via devaluations in December and March.
Demand for dollars usually comes from general public, investors and importers, said Afzal.
“As our imports are more than our exports and other foreign exchange inflows, the pressure on US dollar (reserves) keeps mounting,” he said.

 

Pakistan is also taking steps against money laundering as part of its international commitment to combat terror financing, ahead of a meeting of the Financial Action Task Force meeting in June, when Pakistan will be greylisted.
As part of the measures, State Bank of Pakistan recently directed currency exchange companies to maintain records of identification documents of customers for all foreign currency transactions worth $500 or more, in line with similar thresholds in other international jurisdictions.
“The move of State Bank of Pakistan is aimed at documenting the transactions in order to discourage terror financing,” said Afzal, who added that such requirements had little impact on exchange rates.
But foreign exchange dealers have claimed that lowering the transaction threshold for identification requirements from $2,500 to $500 has negatively impacted business.
“Our daily surplus supply of dollar was around $3 million per day until a week ago, when the central bank’s measures were not enforced,”,Malik Bostan, president of the Forex Association of Pakistan, told Arab News.
“Now the supply is now down to only $1 million per day as currency exchange business has shifted to unregistered dealers.”
“There are around 30,000 unlicensed currency dealers all over Pakistan,” he claimed, adding that the majority of buyers and sellers do not want to share their identification and choose to go to unregistered dealers.
“We have asked the central bank to come up with necessary laws to protect registered currency dealers,” Bostan said. 
“Despite facing adverse business situation we have assured our support to central bank to take whatever steps are needed to get the Pakistan off the grey list of FATF.”
He said that the pressure on the dollar was unusual in the month of Ramadan when dollar inflows typically rise.

FACTOID

Pakistan's current account deficit has reached a historic high of about $14 billion.