Fitch downgrades Saudi credit rating citing ‘risk of further attacks’

Rating agency Fitch downgraded Saudi Arabia’s credit rating to A from A+ on Monday, citing rising geopolitical and military tensions in the Gulf following an attack on its oil facilities and a deterioration of the kingdom’s fiscal position.

The Saudi finance ministry said it was disappointed by the “swift” downgrade and urged Fitch to reconsider it, arguing the move did not reflect the kingdom’s response to the Sept. 14 attack or its capacity to handle adversity.

The move – which places Saudi Arabia one notch above the assessment of peer rating agency S&P Global – is a blow to the largest Arab economy as it seeks investment to diversify away from oil and prepares a potential international sale of U.S. dollar denominated Islamic bonds.

It follows an unprecedented attack on Saudi oil plants which initially halved the crude output of the world’s largest oil exporter. Riyadh blamed adversary Iran, a charge Tehran denies.

“In our view, Saudi Arabia is vulnerable to escalating geopolitical tensions given its prominent foreign policy stance, including its close alignment with U.S. policy on Iran and its continued involvement in the Yemen war,” Fitch said on Monday.

It saw a risk that the United States and Saudi Arabia could be drawn into a deeper conflict with Iran or its allies.

“Although oil production was restored fully by end-September, we believe that there is a risk of further attacks on Saudi Arabia, which could result in economic damage.”

The finance ministry said the kingdom had shown “restraint and careful consideration” in its response and had acted immediately and effectively to maintain global oil supplies.

Saudi officials have said the Sept. 14 strike would not affect state finances or growth, but investors and analysts said it could have a long-term impact on ambitious plans to diversify the Saudi economy and attract foreign capital.

“We have revised our assessment of the vulnerability of Saudi Arabia’s economic infrastructure to regional military threats as a result of the most recent attack,” Fitch said.

Fitch is the first agency to change Riyadh’s credit rating — used by investors to assess the risk associated with a debt issuer — since the attacks, the most dramatic of several incidents this year raising Iranian-Saudi tensions.

S&P Global Ratings last week affirmed its A-(minus) rating, saying however that its rating could come under downward pressure should Saudi oil infrastructure be attacked repeatedly.

Fitch said it was forecasting a widening of the Saudi fiscal deficit to 6.7% of GDP from last year’s 5.9%, due to a loosening of fiscal policy and lower average oil prices and production.

The finance ministry said the deficit was “well within the parameters” it had set for the 2019 budget and that financial assets “substantially exceed” liabilities.

Ratings agency Moody’s cut its 2019 forecast for Saudi economic growth to 0.3% from 1.5% after the attacks, though said it was largely due to an overall decline in oil production.

Fitch’s downgrade comes ahead of a planned issue of international Islamic bonds by the kingdom, and the rating move could potentially affect the cost of Saudi Arabia’s debt issue.

“The dollar sukuk would be a good test to see if pricing has been impacted, albeit slightly given that S&P last week kept its rating untouched,” sad John Sfakianakis, chief economist at Gulf Research Center.

The downgrade also comes as state oil giant Aramco presses on with its initial public offering (IPO) plans, a pillar of Crown Prince Mohammed bin Salman’s diversification drive.

Dollar-denominated bonds issued by the Saudi government didn’t move much in the wake of the downgrade. The 2047 issue XS1694218469=TE was down 0.5 cent at 113.50 cents in the dollar, according to Tradeweb data, little changed from earlier in the trading session. The 2046 issue XS1508675508=TE was 0.3 cent lower at 111.55 cents in the dollar.

“People are focusing on the returns and how low the debt is and the fact foreign assets are large,” said Giyas Gokkent, of JPMorgan Securities, when asked why there hadn’t been a large bond market reaction.

“In an environment where the Fed is easing there’s appetite among investors for strong names in the Gulf of which Saudi Arabia is one.”

Fitch rated Aramco A+ in April, when the company for the first time disclosed its finances before an inaugural bond issue. The rating agency said at the time it put Saudi Aramco’s “standalone credit profile (at) ‘AA+’”, adding that its rating was “capped by that of Saudi Arabia in view of strong linkage between the state and the sovereign.”