Saudi Arabia’s oil wealth humbled in face of credit downgrade

The September 14 attacks on Saudi Arabia’s oil facilities were an eye opener for international investors. The cruise missiles and drones had left the Abqaiq oil processing plant and Khurais field under a plume of black smoke, cutting off half of the kingdom’s oil supply and sending oil prices soaring. 

Concerns over its economic stability were reaffirmed this week when the rating firm Fitch downgraded Saudi Arabia’s long-term foreign currency issuer default rating from A plus to A in the wake of rising geopolitical tensions. 

The downgrade in credit outlook comes at a testing time for Riyadh, which is trying to stir enthusiasm for the shares of its state-owned oil giant Saudi Aramco, ahead of an initial public offering. 

Saudi Arabia derives more than two-thirds of its revenue from the production and export of oil. Despite recent attempts to diversify its economy, the government still depends on oil to meet its spending needs. 

“It was to be expected why the rating agency would be cautious, given that the attack on Abqaiq did expose vulnerability of Saudi oil infrastructure,” David Butter, a Middle East analyst at Chatham House, told TRT World. 

“It would take some time for the production to be completely restored and in the meantime you can’t rule out the possibility of more attacks.”

Saudi Arabia and the United States have accused Iran of being directly responsible for launching the attack but Tehran says it has nothing to do with it. 

Iran has given weapons and technical assistance to Yemen’s Houthi rebels who are fighting a Saudi-led coalition and had claimed responsibility for targeting Saudi oil facilities previously. 

The New York-based Fitch says it’s decision was also based on deterioration in Saudi Arabia’s fiscal and external balance sheets. 

Crown Prince Mohammad Bin Salman wants to open up the Saudi economy and he has reduced restrictions on women and entertainment in the conservative country as part of a social liberalisation campaign in order to improve the country’s image. But the ambition to drive more income from sectors such as tourism are years from becoming realised. 

“They have introduced VAT [value added tax] and other charges to increase non-oil revenue in the budget but in some ways they have made things difficult for the private sector,” says Butter. 

The reduction in subsidies on fuel and other utilities such as water has hit Saudi households and businesses, which have cut back on spending. This has added further pressure on the government to boost expenditure to sustain a sagging economy. 

Another ratings firm Moody’s Investor Service has cut Saudi’s economic growth forecast to 0.3 percent for 2019, from an earlier estimate of 1.5 percent, according to The Wall Street Journal  report. 

Crown Prince Salman’s highhanded approach in dealing with economic matters has dented his own efforts.

In late 2017, Saudi Arabia announced the detention of hundreds of business tycoons, including members of the royal family, in an anti-corruption purge. Saudi authorities said it was a long-awaited clampdown on a system of privilege that has made a select few super-rich in the kingdom. 

But the campaign, which ended earlier this year, turned out to be nothing more than a ruse for the crown prince to sideline competitors and take control of companies such as MBC, a popular Arabic broadcaster. 

Activists say there was no proper trial and none of the accused were taken to court. 

The murder of journalist Jamal Khashoggi inside the Saudi consulate in Istanbul also hurt Crown Prince Salman’s attempt to attract foreign investment, evident from the low turnout at a much anticipated investment conference last October. 

Now Riyadh appears desperate to sell a stake in Saudi Aramco, dubbed the world’s most profitable company, at as high a price as it can. 

The Financial Times reported on Tuesday that the Saudi government was considering reducing corporate tax on Aramco to make its IPO more enticing to investors. 

Butter says the kingdom will use the proceeds from the sale to fund investments by its sovereign wealth arm - Public Investment Fund of Saudi Arabia.  

“They want to invest this money around the world and if the investments are successful then it would be a form of non-oil revenue for the government,” explains Butter.