Saudi rating to be judged on ‘reform progress’ not oil price warns Moody’s

Higher oil revenues may persuade GCC countries to slow down economic diversification programs and non-oil sector development. (Shutterstock)
Updated 16 May 2018
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Saudi rating to be judged on ‘reform progress’ not oil price warns Moody’s

  • “A simple reversion to oil price strength” will not result in an automatic strengthening of Saudi Arabia’s or any other GCC state’s sovereign ratings
  • Development of non-oil economies increasingly important when assessing sovereign credit quality, agencies caution

LONDON: Saudi Arabia’s future sovereign credit rating will be judged on the success of its reform program rather than its oil revenues, rating agency Moody’s has told Arab News.
The global credit rating agency’s Managing Director of Global Sovereign Ratings, Alastair Wilson, said he attached importance to institutional determination to implement change and would also look at efforts made to diversify the economy to make it less reliant on fossil fuels.
He said “a simple reversion to oil price strength” would not result in an automatic strengthening of Saudi Arabia’s or any other GCC state’s sovereign ratings, “hence this was a wake-up call and the authorities recognized this.”
“In other words, structural weakness … based on hydrocarbon dependence needs to be corrected. That’s not going to go away.”
The successful implementation of the Kingdom’s plans over the next 10-12 years would be “challenging” but by no means impossible, he said.
Wilson said he was expecting “some success” over time, but no one anticipated “transformation overnight.”
Moody’s would take into account a number of factors before assigning a revised rating for KSA, he said. These would include the success of efforts to diversify revenue streams in order to insulate the government from “further oil price shocks.”
There were four cornerstones to credit ratings, he said — “accounts’ strength, institutional strength, fiscal strength and the ability to withstand exposure to shocks.”
“Institutional strength is linked to effective implementation of policies, the way policy reforms are articulated, and the attainment of stated objectives. All this, we will feed through our analysis … to help us to assess institutional fortitude.”
He explained that Moody’s wasn’t necessarily looking at metrics based on quantity, so there would be an element of judgment linked to quality (of institutional oversight) in the short to medium term.
“Over time we will see the benefits of reforms that the governments expect to see. Perhaps we will get higher growth because we will get higher growth in the non-oil economy.”
Wilson said an important indicator of a more resilient fiscal position was the non-oil balance sheet. “The non-oil fiscal deficit in most of these (GCC) countries is very high. We expect to see this coming down. We would expect to see lower volatility in economic growth over a period of time, say during a five, 10 or 15-year period.”
Over the next few years Moody’s would deliver “essentially a qualitative judgment” on reform efficacy, said Wilson. Although the oil price would be largely ignored, he agreed that a high price could buy time for GCC governments.
But he warned: “The supply and demand drivers in the market are not a great deal different from where they were a year or so ago… Yes, oil could go to $100 per barrel, but we don’t think that’s sustainable …. we think GCC countries have learnt from the oil price shock that what has been happening is structural in nature. The oil price can alleviate pressure, but is not central to our analysis,” he said.
David Staples, managing director and head of emerging EMEA corporates, said at a London emerging market forum that GCC governments had been clear about what they wanted to achieve, so “in a way we are measuring them against their own (stated) goals.”
Rehan Akbar, vice president of Middle East and Turkey corporates for Moody’s, said at the forum that there had been an acceleration of debt issuance in the past couple of years. Growth opportunities for businesses in the GCC were less than average, he said. Scope for businesses to grow organically were slightly subdued as new taxes and the withdrawal of subsidies had constrained consumption.
“We will probably see more cost control, and more M&A both in the region and outside,” said Akbar.
Earlier this month, Moody’s said in its annual credit analysis report on Saudi Arabia that the Kingdom’s (A1 stable) credit strengths included a strong fiscal position, substantial external liquidity buffers, a large stock of proved oil reserves combined with low extraction costs, and prudent financial system regulation.
“The stable outlook reflects our view that risks to Saudi Arabia’s credit profile are broadly balanced. The government’s reform program, including the plans to balance the fiscal budget by 2023, could over time offer a route back to a higher rating level,” said Moody’s.


US says conserving oil is no longer an economic imperative

Updated 25 min 31 sec ago
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US says conserving oil is no longer an economic imperative

  • Fears of oil scarcity no longer driver of US energy policy
  • Surging shale production brings energy abundance

WASHINGTON: Conserving oil is no longer an economic imperative for the US, the Trump administration declares in a major new policy statement that threatens to undermine decades of government campaigns for gas-thrifty cars and other conservation programs.
The position was outlined in a memo released last month in support of the administration’s proposal to relax fuel mileage standards. The government released the memo online this month without fanfare.
Growth of natural gas and other alternatives to petroleum has reduced the need for imported oil, which “in turn affects the need of the nation to conserve energy,” the Energy Department said. It also cites the now decade-old fracking revolution that has unlocked US shale oil reserves, giving “the United States more flexibility than in the past to use our oil resources with less concern.”
With the memo, the administration is formally challenging old justifications for conservation — even congressionally prescribed ones, as with the mileage standards. The memo made no mention of climate change. Transportation is the single largest source of climate-changing emissions.
President Donald Trump has questioned the existence of climate change, embraced the notion of “energy dominance” as a national goal, and called for easing what he calls burdensome regulation of oil, gas and coal, including repealing the Obama Clean Power Plan.
Despite the increased oil supplies, the administration continues to believe in the need to “use energy wisely,” the Energy Department said, without elaboration. Department spokesmen did not respond Friday to questions about that statement.
Reaction was quick.
“It’s like saying, ‘I’m a big old fat guy, and food prices have dropped — it’s time to start eating again,’” said Tom Kloza, longtime oil analyst with the Maryland-based Oil Price Information Service.
“If you look at it from the other end, if you do believe that fossil fuels do some sort of damage to the atmosphere ... you come up with a different viewpoint,” Kloza said. “There’s a downside to living large.”
Climate change is a “clear and present and increasing danger,” said Sean Donahue, a lawyer for the Environmental Defense Fund.
In a big way, the Energy Department statement just acknowledges the world’s vastly changed reality when it comes to oil.
Just 10 years ago, in summer 2008, oil prices were peaking at $147 a barrel and pummeling the global economy. OPEC was enjoying a massive transfer of wealth, from countries dependent on imported oil. Prices now are about $65.
Today, the US is vying with Russia for the title of top world oil producer. US oil production hit an all-time high this summer, aided by the technological leaps of horizontal drilling and hydraulic fracturing.
How much the US economy is hooked up to the gas pump, and vice versa, plays into any number of policy considerations, not just economic or environmental ones, but military and geopolitical ones, said John Graham, a former official in the George W. Bush administration, now dean of the School of Public and Environmental Affairs at Indiana University.
“Our ability to play that role as a leader in the world is stronger when we are the strongest producer of oil and gas,” Graham said. “But there are still reasons to want to reduce the amount we consume.”
Current administration proposals include one that would freeze mileage standards for cars and light trucks after 2020, instead of continuing to make them tougher.
The proposal eventually would increase US oil consumption by 500,000 barrels a day, the administration says. While Trump officials say the freeze would improve highway safety, documents released this month showed senior Environmental Protection Agency staffers calculate the administration’s move would actually increase highway deaths.
“American businesses, consumers and our environment are all the losers under his plan,” said Sen. Tom Carper, a Delaware Democrat. “The only clear winner is the oil industry. It’s not hard to see whose side President Trump is on.”
Administration support has been tepid to null on some other long-running government programs for alternatives to gas-powered cars.
Bill Wehrum, assistant administration of the EPA’s Office of Air and Radiation, spoke dismissively of electric cars — a young industry supported financially by the federal government and many states — this month in a call with reporters announcing the mileage freeze proposal.
“People just don’t want to buy them,” the EPA official said.
Oil and gas interests are campaigning for changes in government conservation efforts on mileage standards, biofuels and electric cars.
In June, for instance, the American Petroleum Institute and other industries wrote eight governors, promoting the dominance of the internal-combustion engine and questioning their states’ incentives to consumers for electric cars.
Surging US and gas production has brought on “energy security and abundance,” Frank Macchiarola, a group director of the American Petroleum Institute trade association, told reporters this week, in a telephone call dedicated to urging scrapping or overhauling of one US program for biofuels.
Fears of oil scarcity used to be a driver of US energy policy, Macchiarola said.
Thanks partly to increased production, “that pillar has really been rendered essentially moot,” he said.