Why Fitch is wrong to downgrade Saudi Arabia
Fitch Rating Agency has recently downgraded Saudi Arabia in response to the attacks of Sept. 14. Fitch based its downgrading on the Kingdom to A from A+ with a stable outlook following the recent attacks on Saudi Aramco plants in Abqaiq and Khurais (which resulted in production suspension of 5.7 million barrels of crude oil per day) and political tension in the region.
This kind of rating, according to a statement issued by the Ministry of Finance, usually reflects both the country’s economic and fiscal strengths and also it demonstrates the institutional capacity to stage an effective response to an external shock.
The ministry expressed its disappointment and said Fitch took a swift decision to downgrade the Kingdom. The ministry supported its arrangement by highlighting the Kingdom’s outstanding capacity to effectively deal with adversities, as evidenced by Saudi Aramco’s commitment to maintaining stability in the global oil markets and the Kingdom’s status as an important international ally.
As such, the downgrade of the rating comes across as somewhat speculative without direct reference to the swift, decisive and effective response to the event. Furthermore, the Kingdom has illustrated restraint and careful consideration in its response, which should act as a reassurance for the international community.
In its announcement, the ministry said that Saudi Arabia’s oil supply is fully back online after the attacks halved output and the Kingdom has reached 11.3 million barrels per day (bpd) capacity and will reach 12 million bpd by the end of November.
With regard to the financial strength of the Kingdom, the ministry has stated that the budget deficit is within the parameters set for the 2019 Budget and the Kingdom is committed to focus on increasing its investment in key Vision 2030 reform plan areas.
The ministry has stated that Kingdom has one of the strongest reserves in the world and the country’s financial assets substantially exceed its liabilities.
With all respect to the Fitch rating on the Kingdom’s financial and credit strength, I do believe that it has aggressively jumped to a conclusion by downgrading Saudi Arabia’s rating, especially when considering that Fitch did not pay enough attention to the following points.
First, Aramco’s decision to continue its sales and quick return to production has violated all expectations. The Kingdom is one of the few countries in the world that enjoys huge foreign reserves of about $503 billion as of July, which constitutes about one-third of the government deposits which enable the government to absorb the challenges and finance the deficit if necessary.
Saudi Arabia has historically dealt with multiple risks and succeeded in containing them and protecting its economy and financial system.
The pricing of debt instruments issued by the Saudi government or by Saudi companies in the secondary market were not affected by the Fitch’s rating and there will be no impact on the issuance of dollar-dominated bonds.
Finally, the world is hungry for bonds issuance with a positive yield and the Kingdom is considered to be one of the best three countries in the world to offer a positive financial returns.
• Talat Zaki Hafiz is an economist and financial analyst.