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.


Can green investment help relaunch Germany’s economy?

Updated 19 min 42 sec ago

Can green investment help relaunch Germany’s economy?

  • The German government has so far shown little willingness to change its stance

FRANKFURT, Germany: A recession looms for Germany and the European Central Bank is pleading for governments to spend more to revitalize economic growth. Yet despite having the luxury of borrowing money for less than nothing, the German government is keeping a tight rein on its finances.
A debate over Germany’s devotion to budget austerity is intensifying as the outlook for the economy dims and public pressure grows to address big issues such as global warming. On Friday, the government will unveil a raft of measures that could include billions in incentives and spending to make the economy more environmentally-friendly.
“The call for fiscal stimulus has never been louder,” said Carsten Brzeski, chief economist for the bank ING Germany. “And this week will show whether the eurozone country with the deepest pockets finally plans to empty them.”
The slowdown in growth across Europe, blamed largely on the US-China trade conflict and uncertainty about Brexit, is putting a sharp focus on Germany’s devotion to the so-called “Schwarze Null,” or “black zero,” which refers to the policy of balancing the budget — the zero — with at least a small surplus to keep it in the black.
The debate over government spending policy affects the entire 19-country eurozone, since more government outlays by Germany and other fiscally sound countries such as the Netherlands could help support growth by building new infrastructure, such as roads, rail lines or high-speed Internet, or by gathering less in taxes.
The German government has so far shown little willingness to change its stance. It has ignored repeated pleas from the head of the European Central Bank, Mario Draghi, who said last week it was “high time” for government spending to take over as the main tool of economic policy. The central bank announced interest rate cuts and bond purchases in an attempt to ward off a downturn.
The government argues it’s important to reduce debt while the economy is growing and not to burden future generations. German Finance Minister Olaf Scholz submitted a balanced draft budget of 360 billion euros ($400 billion) for 2020 last week and Chancellor Angela Merkel said in a speech before the German Taxpayers’ Federation that the government was sticking to its balanced budget, “not as a goal in itself, as we are often accused of doing, but because clear economic reasons and fairness aspects argue for that.”
Merkel noted that Germany’s total debt would fall below 60% of gross domestic product — the limit for countries that use the euro — for the first time since 2002. The German constitution itself sharply limits deficits to 0.35% of GDP except in a crisis, yet the government’s surpluses go well beyond that requirement.
While the German government may not be giving up on balanced budgets, there are signs it is at least easing up the zeal with which it amasses surpluses.
Last year’s surplus of 1.9% of GDP has fallen to 1.4% this year and is expected to hit 0.9% next year — meaning that the government is already providing some fiscal stimulus. Germany’s economy shrank 0.1% in the second quarter and underlying figures are pointing to another quarter of contraction, which would put the country in a technical recession.
It is striking that the government refuses any new borrowing at a time when it can do so at negative interest rates — meaning it would get paid back more than it borrows. German 10-year bonds currently yield minus 0.48%, and the government was able to sell a 30-year bond at a negative interest rate in August.
Marcel Fratscher, the head of the German Institute for Economic Research in Berlin, has called the balanced budget a “false fetish.” His institute has argued that Germany needs to invest in long-term modernization projects such as extending digital services in rural areas.
The president of the Federation of German Industries, Dieter Kempf, said in an interview with Der Spiegel that “it’s worth considering sensible use of the space,” allowed by the constitution to fund more investment.
The calls to spend are not coming only from those concerned about the economy, but also climate activists who say more needs to be done to shift the world economy from carbon-intensive industries and consumption. Public pressure has only grown after the country witnessed its hottest summer on record and the opposition Greens party made big gains in elections to the European Parliament and in domestic polls.
On Friday, the government is expected to unveil a package of incentives aimed at reducing carbon dioxide emissions from homes and autos so that Germany can meet its goals under the 2015 Paris climate accord. Possible measures include incentives to replace old heating systems or to purchase battery-powered autos. A report in Die Welt newspaper said the government was considering measures totaling some 40 billion euros ($44 billion) through 2023.
Brzeski said such a program “would not be enough to stop the slide of the economy toward recessionary territory, but it could be an important cornerstone in Germany’s recovery and its quest for a new economic model.”
Spending on that level would only be “a slow-motion stimulus” since it will take time to roll out, said Holger Schmieding, chief economist at Berenberg bank.
“It will add up over time and support domestic demand,” he said. “However, the German stimulus will not be a European, let alone a global, game changer.”