Fitch affirms Saudi Arabia's rating at 'AA-'

Updated 15 September 2013

Fitch affirms Saudi Arabia's rating at 'AA-'

Fitch Ratings has affirmed Saudi Arabia's Long-Term foreign and local currency Issuer Default Ratings (IDRs) at "AA-". The Outlook is Positive. Fitch has also affirmed Saudi Arabia's Country Ceiling at "AA" and Short-Term foreign currency IDR at "F1+".
Fitch Ratings said Saudi Arabia's external balance sheet has been bolstered so far in 2013. Central bank net foreign assets, the bulk of sovereign foreign assets, are up by 4.4 percent of GDP over the first seven months of the year and with no sovereign external debt, the net external creditor position is likely above 100 percent of GDP (from 96 percent of GDP at end-2012). Double-digit current account surpluses are expected each year to 2015, which will further bolster the external position.
Fiscal buffers have been enhanced, with rising government deposits and falling government debt over the first seven months of the year reinforcing a net creditor position that is the second-strongest of all Fitch-rated sovereigns. Lower oil prices will narrow, but not eliminate, the fiscal surplus by end-2015, when the fiscal breakeven oil price is forecast at $86 a barrel, compared with a Fitch-estimated 2012 level of $76 a barrel.
Commenting on the Fitch report, John Sfakianakis, chief investment strategist at Masic, a Riyadh-based investment firm, said: “The rating is one of several assessments that confirm Saudi Arabia's solid macro economic picture. Debt is one of the lowest in the world which confirms the efforts of the Ministry of Finance to lower liabilities to the lowest bearable level.”
He said: “The next step for the rating agencies would be to affirm Saudi Arabia's rating upgrade which would reflect a closer reality of the very positive picture that the economy demonstrates over a sustainable and long period.”
Economic growth is robust, particularly for the nonoil sector. Real GDP growth slowed to 2.4 percent yoy over H1, 2013, compared with an average over the past five years of 4.6 percent, due to lower oil production. Nonoil growth was 4.5 percent in H1, 2013 and is on track to outpace oil sector growth for the seventh year of the past nine in 2013. Real nonoil growth is forecast to exceed 5 percent in 2014 and 2015, diversifying the economy. Oil accounts for around half of GDP and oil revenue-funded government spending has been a major stimulus for the private sector.
Labor market reforms are contributing to a significant increase in the number of Saudi nationals employed in the private sector. Although the unemployment rate was unchanged in Q1, 2013, this likely reflects an increase in labor force participation, as the number of nationals working in the private sector was up by 21 percent in the first seven months of the year. New moves to correct the status of expatriates and bolster training for job seekers will assist in policy formulation and labor market clearance and should help the authorities to deal with what Fitch considers a potential source of social stress.
Indicators of the health of the banking sector strengthened over H1, 2013. Capital adequacy and loan-loss coverage were up (at 17.9 percent and 166 percent, respectively) and NPLs had fallen to 1.63 percent. Banks remain liquid and the sector is well regulated. Risks arising from the banking sector are judged to be low.
The economy is heavily dependent on oil. Oil accounts for 90 percent of fiscal revenues and 80 percent of current account revenues, levels that are little changed over the past decade. However, large and growing buffers mean it would take a prolonged period of much lower oil prices to materially undermine the fiscal and external positions. Oil reserves are large and the Kingdom maintains substantial spare capacity that it uses to smooth disruption to production elsewhere.
Exposure to geopolitical risks is high relative to peers as Saudi Arabia is a big player in a turbulent region. There is heightened uncertainty about the course of events in Syria and instability and threat of conflict in other parts of the region. In common with other GCC members, voice and accountability and other governance indicators score weakly according to World Bank measures, though steps are being taken to tackle some potential sources of domestic social strains.
Fitch considers the exchange rate peg to the US dollar to be a key policy anchor, even though it constrains policy flexibility. Transparency on fiscal policy and outturns is a weakness relative to peers and overspending is common.

Iran sanctions shadow falls on smaller German banks

Updated 27 May 2018

Iran sanctions shadow falls on smaller German banks

  • Some German companies plan to press on with Iran dealings
  • German exports to Iran rose 15.5 percent last year

Germany’s biggest lenders have shied away from business with Iran after past penalties for breaching US sanctions, but smaller banks have leapt on opportunities afforded by the nuclear deal rejected by Donald Trump.

There are just months to go until a November deadline issued by Washington after the US president abandoned a hard-fought agreement that loosened business restrictions on the Islamic Republic in exchange for Tehran giving up its pursuit of nuclear weapons.

But some firms plan to press on in their dealings with Iran despite the looming threat of penalties.

“We will continue to serve our clients,” for now, said Patrizia Melfi, a director at the “international competence center” (KCI) founded by six cooperative savings banks in the small town of Tuttlingen in southwest Germany.

The center, which supports companies operating in sensitive markets like Iran or Sudan, has seen demand “rising sharply in the last few years, from firms listed on the Dax (Germany’s index of blue-chip firms), from all over Germany and from Switzerland,” she added.

German exports to Iran have grown since the nuclear deal was signed in 2015, adding 15.5 percent last year to reach almost €2.6 billion ($3.0 billion) after 22-percent growth in 2016.

Such figures remain vanishingly small compared with Germany’s €111.5 billion in exports to the US — its top customer.

Nevertheless, the KCI will “wait and see what the sanctions look like” before turning away from Iran, Melfi said.

Already, firms dealing with Tehran must take great care not to fall foul of US restrictions.

Transactions are carried out in euros, and the KCI does not deal with businesses that have American citizens or green card resident holders on their boards.

What’s more, products sold to Iran cannot contain more than 10 percent of parts manufactured in the US.

One of the most important inputs for the business is “courage among our managers” given the high risks involved, Melfi said.

Germany’s two biggest banks, Deutsche Bank and Commerzbank, avoid Iran completely after being slapped with harsh fines in 2015 over their dealings there, with Deutsche alone paying $258 million in penalties.

DZ Bank, which operates as a central bank for more than 1,000 local co-op lenders, is withdrawing completely from payment services there, a spokesman told AFP.
That left KCI to seek out the German branch of Iranian state-owned bank Melli in Hamburg.

Even that linkage could break if Iran’s biggest business bank appears on a US list of barred businesses as it has before.

Meanwhile, among Germany’s roughly 390 Sparkasse savings banks, business with the regime is mostly limited to producing documents linked to export contracts.
“We will be looking even more closely at those” in the future, a person familiar with the trade told AFP.

Elsewhere in the German economy, the European-Iranian Trade Bank (EIH) founded in 1971 is another conduit to Tehran.

Also based in Hamburg, it for now remains “fully available to you with our products and services,” the bank assures clients on its website, although “business policy decisions by European banks may result in short term or medium term restrictions on payments.”

Neither does the Bundesbank (German central bank) believe that much has so far changed for business with Iran.

“Only the European Union’s sanctions regime will be decisive,” if and when it is changed, the institution told AFP.

Any payment involving an Iranian party would have to be approved by the Bundesbank if things return to their pre-January 2016 state.

German banking lobby group Kreditwirtschaft has called on Berlin and other EU nations to clarify their stance — and to make sure banks and their clients are “effectively protected against possible American sanctions.”

KCI’s Melfi said time is running out for EU governments to act.

“Many firms just want to stop anything with Iran, since they can’t calculate the risk of staying,” she noted.

On Friday for the first time since the Iran nuclear deal came into force in 2015, China, Russia, France, Britain and Germany gathered in Vienna — at Iran’s request — without the US, to discuss how to save the agreement.