S&P downgrades Saudi Arabia’s rating

As low oil prices continue to reveal their negative impact on world’s number one crude exporter, credit rating agency Standard & Poor’s confirms Saudi Arabia’s economic downturn by cutting its rating

Photo by: AP
Photo by: AP

Standard & Poor's cut its rating on Kingdom of Saudi Arabia's long-term foreign and local currency sovereign credit to 'A plus/A-1' from 'AA minus/A-1 plus,' citing a "pronounced negative swing" in Saudi Arabia's fiscal balance.

S&P said it expected Saudi Arabia's fiscal deficit to increase to 16 percent of GDP in 2015, from 1.5 percent in 2014, reflecting the sharp drop in oil prices.

"High reliance on hydrocarbon revenues and inflexible current expenditures, point to vulnerabilities in Saudi Arabia's public finances," S&P said in a statement.

Low oil prices have slashed the revenue of the world's top crude-exporting country, saddling it with a state budget deficit that is expected to be well over $100 billion this year.

After years in which state spending rose continuously on the back of sky-high oil prices, the Saudi economy may be in for a more difficult period. Many economists expect growth to slow in 2016 from its current rate of roughly 3 percent.

The central bank, which serves as the country's sovereign wealth fund, has been liquidating assets to cover the huge state budget deficit caused by the drop in oil prices.

The pace of decline in Saudi Arabia's net foreign assets has slowed since early this year, however, partly because the government resumed issuing domestic bonds in July for the first time since 2007, reducing the need to sell assets abroad.

The drop may slow further in coming months as the government takes austerity steps to restrain spending and raise more revenue from non-oil sources.

The International Monetary Fund warned last week that the kingdom will exhaust its financial reserves in under five years if its fiscal policy stays unchanged.

The ratings agency kept its negative outlook on the kingdom.