Saudi Arabia’s austerity, privatization and taxation measures will not be sufficient to reduce the deficit to the desired extent, leading to the kingdom seeing a deficit of $80-$90 billion or 13 per cent of the GDP in 2016, a report said.

Cost-cutting pressure and declining government investments in Saudi Arabia will also put pressure on medium-term growth, added the credit report by Independent Credit Review (I-CV), a subsidiary of Fisch Asset Management, one of the leading credit analysis and convertible bond specialists.

 The report affirms a rating of A- for Saudi Arabia’s sovereign credit, with the expectation that rating agencies will downgrade the Kingdom by 1-2 notches over the next 18 months. Such a likelihood would be reinforced by a slowdown in the oil price recovery or signs that domestic reforms are taking longer than timetabled.

The study states that compared with the UAE, Qatar and Kuwait, Saudi Arabia faces the greatest economic challenges. Its fiscal break-even oil price in 2015 was $95, versus an average of $74 for its peer group. A 35 per cent reduction in expenditures at an oil price of $35/barrel or a 20 per cent reduction at $50/barrel would be required to achieve a balanced budget for 2016. This leads to the expectation that Saudi Arabia will record a deficit of approximately $80-90 billion (13 per cent of GDP).

Peter Jeggli, senior portfolio manager and head research at Fisch Asset Management, said: “Despite pressure on its credit rating, the Kingdom retains a number of key strengths. It has exceptionally large oil reserves and as the world’s largest producer it has traditionally been able to influence supply and pricing in the global market.”

“The country’s oil reserves have a life expectancy of at least 70 years, which is a long time in economic terms. Saudi Arabia’s substantial foreign currency reserves give it considerable flexibility, while the government still has a relatively low level of debt.

“The country has a stable and adequately capitalized banking system, albeit with rising credit default rates, and a strong relationship exists between the government and the banks. Perhaps most importantly, sweeping cost-cutting and restructuring measures driven by Vision 2030 and the National Transformation Plan will play a vital role in economic diversification. We look forward to seeing these come to fruition,” he added.

In addition, I-CV published corporate credit reviews on DP World (UAE) and Equate Petrochemicals (Kuwait) rating both companies as BBB credits.

According to the review, DP World’s positive trend of the past few years has been compromised by the low oil price environment. However, with parent company Dubai World on a positive track with extension of its debt maturities from 2018 to 2022, pressure on DP World has eased.

The strong ownership structure of Equate Petrochemicals (Dow Chemical and government-controlled Petrochemical Industries), along with the company’s strategic relevance to the Kuwaiti economy is highlighted as a key strength.

“Operationally, DP World is making steady progress with its capacity expansion and is regularly tapping into new markets, with a recent focus on Africa. In view of these factors and despite DP World’s relatively cyclical field of business, the rating of the company as a solid BBB credit remains unchanged,” Jeggli concluded.

“Meanwhile, Equate Petrochemicals operates in a volatile but lucrative niche as a supplier to the chemical industry and generates attractive margins thanks to good conditions from suppliers as well as a lean cost base. The company’s strong shareholder support is enhanced by its solid risk profile with ample financial leeway. This is why we view the Equate rating as a firmly anchored credit in the BBB category.”- TradeArabia News Service