Trevor Cullinan, a credit analyst at S&P said that the credit rating for Saudi Arabia could go even lower within the next two years, especially if the country does not achieve a reduction in the government deficit or if the liquid financial assets fall below 100 percent of the GDP.
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It also said the decision did not take into account the sound fiscal position of Saudi Arabia, which is backed by assets of more than 100 percent of gross domestic product besides large foreign currency reserves.
Nevertheless, S&P’s action may feed into investor concern about the long-term direction of Saudi finances in an era of cheap oil, and about the fiscal tightening that Riyadh may have to conduct to get its budget deficit under control.
The bank said that while there may be a few general negativity around low oil prices and the geopolitical situation, it is yet to translate into really weaker economic activity in these two countries.
S&P believes that Saudi Arabia will respond by drawing down its stockpile of cash and issuing more debt.
Another leading rating agency Moody’s Investors Service rates Saudi Arabia as “Aa3” which in comparison with S&P’s current rating is a notch higher.
The A+ rating is six levels above junk status and puts the credit grade in line with countries including Israel and Ireland.
Oil prices have fallen over 55 per cent in the past one year with Brent crude traded at around $49 a barrel yesterday. They have averaged $55.85 so far this year.
After years in which state spending rose continuously on the back of sky-high oil prices, the Saudi economy may be in for a more hard period.
The other major risk is political.
“All this is happening at a time when the credibility of rating agencies has been shaken since the 2008 financial crisis”, he added.
Ali Larijani received a delegation of the visiting members of Supreme Revolutionary Council of Yemen headed by Vice Chairman Naif al-Qanis on Saturday where Larijani ensured them of Islamic Republic of Iran’s support for Yemen as he described as a ‘nation deeply-rooted in history, yet suffering oppression’.
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“Credit metrics for oil producers like Saudi Arabia are coming under pressure”, said Steve Hooker, a money manager at Newfleet in Hartford, Connecticut, who helps oversee $12.5 billion of debt.
