Moody’s Investors Service has played the role of bearer of bad news for the Saudi economy. On 4 March Moody’s announced that Saudi sovereigns which are currently rated at Aa3, that is still a low credit risk and judged to be upper – medium grade, have been “placed on review for a further downgrade.”
Still that was better news than Bahrain received. Their sovereigns were dropped by Moody’s to junk status as the Bahraini economy flounders from a combination of low oil prices and a still unresolved political crisis.
Then, on 8 March Moody’s followed through with what in boxing parlance is called an upper cut announcing that eight major government-related entities in the GCC states have been placed on review for a potential ratings downgrade. Included in the list were three big Saudi companies: SABIC, Saudi Electricity and Saudi Telecom.
The culprit is the obvious one: the collapse of oil prices: “The most direct effect of lower oil prices on a sovereign’s creditworthiness is through the impact on public finances. The reliance on oil revenues and whether they are willing and able to adjust expenditure will determine the magnitude of fiscal deterioration and the effect on public debt,” Moody’s said.
Despite efforts to diversify, the Saudi government remains highly dependent on oil revenues. The ratings agency notes that, with low prices set to continue for at least the next three years, “boosting non-oil revenues would provide another source of fiscal adjustment but experience shows that it takes time to yield results.”
And while the kingdom attempts to increase its source of non-oil income through a variety of means, including subsidy reductions and the planned introduction of a VAT tax, the deficit continues to grow. The government announced that the public debt in 2016
will run to $87 billion.
However, the good news is that the kingdom still has relatively large central bank reserves and is determinedly carrying through on belt-tightening measures that began in mid 2015.
So what impact then do the ratings have and what do they say about the Saudi economy? Jason Tuvey, Middle East economist at London based Capital Economics says that ratings downgrades are mostly a case of “catching up with reality.” And the reality, he says, is that the economy will experience a significant downturn: “We retain our long-held forecast that GDP growth will slow sharply from 3.4% in 2015 to 1.5% this year.”
He wouldn’t call that a gloomy forecast but rather a “cautionary one,” insofar as the austerity drive though necessary has caused inflation to rise and eroded household incomes thus weighing on consumer spending. The less consumers spend the more the economy suffers.
Tuvey adds that history shows that when governments cut the first thing they look at is capital expenditure. And while high profile, prestige projects like the $23 billion Riyadh metro appear to have their funding ring fenced, other capital initiatives such as housing may feel the pinch.
Indeed, rumours are circulating that the government has cancelled or is about to cancel housing projects. If that does prove to be the case, it may be something of an own goal. Not only is there an urgent need for affordable housing, but the construction trade has the potential for significant job creation for Saudis, particularly in specialized fields such as plumbing, electrical wiring and carpentry.
Of course that requires intensive training programmes, decent wages and an attitude shift – most Saudis consider the construction sector to be beneath them.
Restructuring the Saudi economy, changing the way young Saudis think about work requires patience, skill and time. Patience and skill there may be in abundance but time is a different matter. Hence the sense of urgency displayed by the deputy crown prince Mohammed bin Salman. The prince will need to show that the government can move quickly to achieve the sort of economic revolution he believes the kingdom pressingly needs. In the meantime expect the ratings agencies to pile on the bad news.
Follow Bill Law on Twitter @BillLaw49
