Standard & Poor’s Ratings Services on Friday cut its rating on Saudi Arabia’s long-term foreign and local currency sovereign credit to “A plus/A-1” from “AA minus/A-1 plus,” citing a “pronounced negative swing” in Saudi Arabia’s fiscal balance.
S&P said it expected Saudi Arabia’s fiscal deficit to increase to 16 percent of GDP this year from 1.5 percent last year, reflecting the sharp drop in oil prices.
“High reliance on hydrocarbon revenues and inflexible current expenditures, point to vulnerabilities in Saudi Arabia’s public finances,” S&P said in a statement.
The nation’s credit outlook is negative as the decline in oil prices makes it difficult to reverse the fiscal deterioration, S&P said.
The Saudi Ministry of Finance said it “strongly disagrees with S&P’s approach to ratings management in this particular instance.”
The downgrade was “driven by fluid market factors rather than changes in the fundamentals of the sovereign,” which “remain strong,” the ministry said in a statement on the Web site of state-run Saudi Press Agency.
The country is rated “Aa3” by Moody’s Investors Service, the equivalent of one step higher than S&P’s new grade. S&P’s classification for Saudi Arabia is the same as those of Slovakia, Ireland, Bermuda and Israel.
Low oil prices have slashed the revenue of the world’s top crude-exporting country, saddling it with a state budget deficit that is expected to be well over US$100 billion this year.
After years in which state spending rose continuously on the back of sky-high oil prices, the Saudi economy might be in for a more difficult period.
Many economists have said they expect growth to slow next year from its current rate of about 3 percent.
The central bank, which serves as the country’s sovereign wealth fund, has been liquidating assets to cover the huge state budget deficit caused by the drop in oil prices.
The pace of decline in Saudi Arabia’s net foreign assets has slowed since early this year, but partly because the government resumed issuing domestic bonds in July for the first time since 2007, reducing the need to sell assets abroad.
The drop might slow further in coming months as the government takes austerity steps to restrain spending and raise more revenue from non-oil sources.
S&P projects that Saudi Arabia’s general government deficit will decline to 10 percent of GDP next year, 8 percent in 2017 and 5 percent in 2018.
The IMF warned last week that the kingdom will exhaust its financial reserves in under five years if its fiscal policy stays unchanged.
Additional reporting by Bloomberg
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