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
0

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.


Brent oil rises back above $80 as Iran sanctions loom

Updated 13 min 3 sec ago
0

Brent oil rises back above $80 as Iran sanctions loom

  • The US sanctions on the oil sector in Iran are set to start on November 4
  • other producers may struggle to fully make up for the expected Iran disruption, and that oil prices could rise further

SINGAPORE: Brent crude oil prices rose back above $80 a barrel on Monday as markets were expected to tighten once US sanctions against Iran’s crude exports are implemented next month.
Benchmark Brent crude oil futures were at $80.26 a barrel at 0646 GMT, up 48 cents, or 0.6 percent, above their last close.
US West Texas Intermediate (WTI) crude futures were at $69.60 a barrel, up 48 cents, or 0.7 percent.
The US sanctions on the oil sector in Iran, the third-largest producer in the Organization of the Petroleum Exporting Countries (OPEC), are set to start on November 4. The United States under President Donald Trump is trying to reduce Iranian oil exports to zero to force the country to renegotiate an agreement on its nuclear program.
US Treasury Secretary Steven Mnuchin told Reuters on Sunday that it would be harder for countries to get sanction waivers than it was during the previous Obama administration, when several countries, especially in Asia, received them.
OPEC agreed in June to boost supply to make up for the expected disruption to Iranian exports.
However, an internal document reviewed by Reuters suggested OPEC is struggling to add barrels as an increase in Saudi supply was offset by declines elsewhere.
Fatih Birol, executive director of the International Energy Agency (IEA), said on Monday that other producers may struggle to fully make up for the expected Iran disruption, and that oil prices could rise further.
Some relief may come from North America, where US drillers added four oil rigs in the week to Oct. 19, bringing the total count to 873, Baker Hughes energy services firm said on Friday, raising the rig count to the highest level since March 2015.
The US rig count is an early indicator of future output. With activity increasing after months of stagnation, US crude production is also expected to continue to rise.
Reflecting rising US crude exports, the Intercontinental Exchange said its new Permian West Texas Intermediate crude futures contract deliverable in Houston, Texas, will begin trading on Monday.
In addition to the potential for rising oil supply, the ongoing Sino-American trade dispute is expected to start dragging on demand.
“The full impact of the US-China trade war will hit markets in 2019 and could act as a considerable drag on oil demand next year, raising the possibility of the market returning to surplus,” said Emirates NBD bank in a note.
Shipping brokerage Eastport said “Chinese manufacturing is beginning to slow” and that “Trump’s proposal of slapping ... tariffs on additional ... Chinese goods from 1 January would be a further drag on trade.”
K.Y. Lin, spokesman for Taiwan’s Formosa Petrochemical Corp, a major fuel refiner, said “weaker demand in Europe and the US” was already affecting gasoline profit margins as excess fuel is being sent to Asia.