S&P downgrades Saudi Arabia to 'A Minus / A-2'

By Staff Writer

Feb 18, 2016 09:23 AM EST

Standard & Poor's (S&P) has lowered rating on Kingdom of Saudi Arabia (KSA) owing to continuous fall in oil prices. The long -term foreign and local currency sovereign credit has been lowered to 'A minus/ A-2' from 'A plus / A-1.' Saudi Arabia is largely dependent on oil revenues and lower prices dented income basket of the OPEC leader. 

Saudi Arabia along with Russia agreed to freeze oil production level to check the oversupply situation in the global oil market. The oil price below $30 per barrel has been taking a toll on the revenues of Saudi Arabia and other oil producing nations. The oil price fell from $140 18 months ago to below $30 a barrel now. 

CNBC reports that Standard & Poor's (S&P) has lowered Saudi Arabia's credit rating as the Kingdom is suffering from dwindling down of revenues. The key decision of Saudi Arabia will help arrest falling oil prices and make a rebound in oil market. The deal was contingent and other producers in Organization of Petroleum Exporting Countries (OPEC) and non-OPEC nations may also join the decision to control oversupply position.

S&P said in a statement that "the decline in oil prices will have a marked and lasting impact on Saudi Arabia's fiscal and economic indicators given its high dependence on oil." The plunge in oil prices since mid-2014 has not only impacted the revenues of oil exporting countries, but also resulted in cuts in credit ratings.

Along with Saudi Arabia, the credit ratings of other nations have also been lowered. S&P has downgraded credit ratings of Brazil, Kazakhstan, Bahrain and Oman. The latest downgrading is the second largest mass credit cuts on oil producers in the past one year. S&P attributes the reason for downgrading to drop in oil prices. Bahrain lost its investment grade status by S&P, as reported by The Globe And The Mail.

Oil producing countries such as Saudi Arabia, Russia, Brazil and Venezuela are in the list of sovereign default risk.  The firm's Moritz Kraemer, head of sovereign ratings in EMEA at S&P, in January hinted that there would be another such move being considered. The country that was spared this time was Russia. 

In addition to declining revenues from oil price drop, Brazil is also suffering from political uncertainty. Since Saudi currency Riyal is pegged to the US dollar, currency depreciation due to the oil price drop is limited to boost the economy. Saudi Arabia is forced to use its fiscal reserves to keep up the spending levels to support the economy activity. 

S&P has lowered ratings for Saudi Arabia and other nations based on an assumption of oil prices from 2016 to 2019 by about $20 a barrel. Brent rose 0.52 percent and expected to give an average of $40 per barrel in 2016. The oil price is forecast to grow to $50 per barrel by 2018. The government's debt burden may exceed seven percent of gross domestic product (GDP) during 2016-19, as reported by Market Watch.

Moscow has fiscal buffer giving it more leeway, observes S&P. If Western sanctions are reimposed or faster than expected decline in the fiscal buffers happens, then Russia could see cut in BB+ rating, explains S&P. Brazil was put on negative outlook. It may get another downgrade with a probability of one in three chances. S&P may downgrade it from BB+ to BB.

Bahrain is also got credit rating cut by two notches. It lost investment grade status as Bahrain was downgraded to BBB- from BB. Oman was also downgraded to BBB- from BBB+. Kazakhstan was lowered by one notch to BBB- from BBB. It's on negative outlook in the wake of rising concerns about inflation, exchange rate pressure and banking sector stability.

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