Riyadh – Mubasher: The cost-cutting pressure and decreasing government investments in Saudi Arabia will affect the medium-term growth, according to a recent report by Fisch Asset Management.
Austerity, privatization, and taxation measures in Saudi Arabia “will not be sufficient to reduce the deficit to the desired extent in the stated timeframe,” according to credit report issued by Independent Credit Review (I-CV), a subsidiary of Fisch.
The report affirms a rating of ‘A-’ for Saudi Arabia’s sovereign credit, projecting rating agencies to downgrade the Kingdom by 1-2 notches over the next 18 months.
“Such a likelihood would be reinforced by a slowdown in the oil price recovery or signs that domestic reforms are taking longer than timetabled,” the report said.
Compared with the UAE, Qatar, and Kuwait, Saudi Arabia faces the greatest economic challenges, with its fiscal break-even oil price in 2015 at $95, versus an average of $74 for its peer group.
“A 35% reduction in expenditures at an oil price of $35/barrel or a 20% reduction at $50/barrel would be required to achieve a balanced budget for 2016. This leads to the expectation that Saudi Arabia will record a deficit of approximately $80-90 billion (13% of GDP),” it added.
“The country’s oil reserves have a life expectancy of at least 70 years, which is a long time in economic terms. Saudi Arabia’s substantial foreign currency reserves give it considerable flexibility, while the government still has a relatively low level of debt,” Senior Portfolio Manager and Head Research at Fisch Asset Management Peter Jeggli commented.
The report published corporate credit reviews on UAE’s DP World and Kuwait’s Equate Petrochemicals rating both companies as ‘BBB’ credits.
“DP World’s positive trend of the past few years has been compromised by the low oil price environment. However, with parent company Dubai World on a positive track with extension of its debt maturities from 2018 to 2022, pressure on DP World has eased,” the report noted.
Equate Petrochemicals’s strong ownership structure, including Dow Chemical and government-controlled Petrochemical Industries, along with the company’s strategic relevance to the Kuwaiti economy seen highlighted as a key strength.
