Moody's assigns provisional (P)A1 rating to Saudi Arabia's proposed Medium-Term Note Program.
According to the transaction documents available to Moody's, the Notes under the proposed global MTN Program are direct, unconditional and unsecured obligations of the Government of Saudi Arabia (the issuer), and rank and will rank pari passu with all other unsecured external debt obligations of the issuer.
The proposed Notes are governed by English Law and Arbitration is agreed to take place in the UK under the Arbitration Rules of the London Court of International Arbitration. The issuer waives immunity and no person shall have any right to enforce any term or condition of the Notes under the Contracts (Rights of Third Parties) Act 1999.
Saudi Arabia's A1 issuer rating is supported by "Very High" economic and fiscal strengths, which, though weakened following the sharp drop in oil prices, still remain relatively strong. Strong growth in oil revenues in the past generated very large fiscal surpluses through 2013, allowing the government to build a sizeable asset cushion and sharply reduce its debt ratios to levels much lower than rating peers. However, in Moody's view Saudi Arabia exhibits somewhat greater limitations of fiscal policy, and a weaker fiscal stance compared to GCC peers with a fiscal strength assessment of "Very High (+)".
The Kingdom's dominant position in OPEC with the greatest amount of spare capacity - more than all other members combined - makes it geopolitically important for the US and other industrialized nations. Having said that, Moody's rating action on 14 May 2016, in which Saudi Arabia's long-term issuer ratings were downgraded to A1 from Aa3 and assigned a stable outlook, reflects the view that the structural shift in oil prices has led to a material deterioration in Saudi Arabia's credit profile.
A combination of lower growth, higher debt levels -- albeit from a low base -- and relatively smaller domestic and external buffers than before leave the Kingdom less well positioned to weather future shocks. While the government has ambitious and comprehensive plans to address the shock by diversifying its economic and fiscal base, those plans are at an early stage of development and their impact remains uncertain.
Rating constraints are institutional and also related to the challenge of a low oil-price environment. The Worldwide Governance Indicators place Saudi Arabia lower than most peers, although financial sector supervision by the Saudi Arabian Monetary Agency (SAMA) proved effective through the global financial crisis. Saudi Arabia's participation in the IMF's General Data Dissemination System since March 2008, the recent publication of the country's International Investment Position, and its revision of national accounts statistics mark progress in improving transparency, although the overall scope and timeliness of data lag those of most other highly-rated countries globally. Overall, Moody's assessment of Institutional Strength is "High (-)", somewhat lower than for most other A-rated sovereigns.
Saudi Arabia is also among the few highly rated sovereigns with a susceptibility to event risk factor score that is neither "Very Low" nor "Low," but "Moderate." This susceptibility arises from regional geopolitical tensions. The authorities have been relatively successful in neutralizing internal terrorist threats. The royal succession announced in January 2015 allayed concerns about leadership transition, although questions around future succession persist.
The stable outlook on the A1 issuer rating reflects Moody's view that upside and downside risks are balanced. In the absence of further fiscal and economic reform, the pressures on the government's balance sheet would continue to rise. However, the government has ambitious and comprehensive plans to diversify both the economy and its balance sheet which, if even partly successful, should stabilize its credit profile and could, if achieved, offer a route back to a higher rating level over time.
Fulsome implementation of planned fiscal and economic reforms would be credit positive and could support a higher rating. The success of such reforms would likely be reflected in fiscal deficits falling more quickly than currently envisaged, the debt burden peaking at a lower level and growth recovering earlier and more rapidly from a broadening economic base. Such developments would be more positive if they resulted from sustainable structural reforms than from cyclical or temporary increases on the price of oil. A reduction in regional political and security threats would also exert upward pressure on the rating.
Conversely, any signs or combination of the following factors would be credit negative, and could lead to a negative rating outlook or downgrade: loosening fiscal consolidation, such as fiscal deficits staying wide at more than 10 per cent of GDP over the coming two years; government debt ratios rising faster than in Moody's baseline scenario and approaching 50 per cent of GDP by 2018; renewed pressure on the exchange rate and a faster depletion of foreign exchange reserves; signs of difficulties to fund large fiscal and current account deficits in 2017; an escalation of regional geopolitical risks and/or signs of deteriorating domestic political and social stability.
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|Date:||Oct 12, 2016|
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