Fitch downgrades Saudi Arabia's outlook

Baku. 12 April. REPORT.AZ/ Fitch Ratings has downgraded Saudi Arabia's long-term foreign and local currency Issuer Default Ratings (IDRs) to 'AA-' from 'AA'. 

The outlooks on the Long-term IDRs remain negative, Report informs citing Fitch Ratings' press release. The country ceiling is affirmed at 'AA+' and the Short-term foreign-currency IDR is affirmed at 'F1+'.

The downward revision of our oil price assumptions for 2016 and 2017 to USD35/b and USD45/b, respectively, has major negative implications for Saudi Arabia's fiscal and external balances. The central government deficit widened to 14.8% of GDP in 2015, after a deficit of 2.3% in 2014 and continuous surpluses in previous years since 2010. Fitch forecasts the deficit-to-GDP ratio to narrow only marginally in 2016 and, on the back of a moderate recovery in oil prices, more substantially in 2017.

A large share of the government's financing needs will be funded by disposing of foreign financial assets, but the government has also started raising debt domestically. It is also in negotiations on a syndicated loan of up to USD10bn and is planning a first Eurobond issue later this year. This should push the general government debt-to-GDP ratio to 9.4% of GDP in 2017 from 1.5% in 2014, which will still be low compared with peers (36.9%). 

Fitch considers geopolitical risks high relative to 'AA'-rated peers. Tensions have risen between Saudi Arabia and its long-standing regional rival Iran, and are expected to persist, although a direct confrontation is highly unlikely. Saudi Arabia's military intervention in Yemen and in Syria shows a greater assertiveness in foreign policy. 

The banking sector remains healthy but the weaker economic climate has started to affect profitability, with the return on equity falling to 14.5% in 4Q15, the lowest since 2013. A slowdown in loan growth will accompany a moderate rise of the ratio of non-performing loans- to-total gross loans, from a low level of 1.2% in 2015. The sector remains well-supervised with conservative regulation in place.