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Higher Oil Prices Boost Saudi Credit Rating

Good news for Saudi Arabia, but hurdles remain

After suffering from plunging global oil prices in 2015 and 2016, Saudi Arabia can take a much-deserved bow over its success, along with other OPEC and non-OPEC producers, in reigning in oil production by taking some 1.8 million bpd off the market and coming near its goal of oil inventory levels in OECD countries reaching near five-year averages.

However, the country is still running troubling budget deficits that began three years ago when global oil prices plunged from more than $100 per barrel in mid-January 2014 to below $30 per barrel in early 2016. Saudi Arabia’s 2015 budget deficit reached a record high $98 billion, equal to 15 percent of its GDP. The Kingdom’s budget deficit in 2017 was around $61 billion, a steady decline from $79 billion in 2016. For 2018, though the budget deficit was gradually being trimmed, it’s still expected to close the year at $52 billion.

Saudi Arabia receives stable outlook projection

Now, amid the Kingdom’s push to diversity its economy and as Saudi Crown Prince Mohammed bin Salman charms his way through the U.S., S&P Global Ratings offers some good news. On Friday it affirmed Saudi Arabia's credit rating with a stable outlook on the expectation that economic growth will accelerate in 2018 as it continues to boost spending. Related: Oil Rally Means New Lines Of Credit For Permian Players

“The stable outlook is based on our expectation that economic growth will accelerate moderately in 2018, supported by rising government investment,” Benjamin Young and Trevor Cullinan, Dubai-based analysts at S&P Global Ratings, said in a report. Saudi Arabia’s economy is expected to grow 2 percent this year after contracting 0.7 percent last year.

Saudi Arabia’s A-rating puts it firmly in the investment grade category, suggesting that it’s unlikely the government would default on its financial obligations.

S&P had downgraded the kingdom’s credit rating in February 2016. In fact, Saudi Arabia’s finances that year, amid the downturn in global oil prices, became so troubling that analysts both within and outside the kingdom were casting dire predictions.

Mohamed Al Tuwaijri, the Saudi deputy economy minister, said in October that year, in front of a national televised audience, "if we didn't take any reform measures and if the global economy stays the same, then we're doomed for bankruptcy in three to four years.” At the same time Riyadh introduced unpopular austerity measures for the first time that most Saudis could remember.

However, Friday’s news was more upbeat.

“We expect Saudi Arabia will experience modest economic growth from 2018, supported by rising government investment and, later in our forecast period, a gradual increase in oil production,” S&P added in its statement.

Saudi Arabia’s economy last year, even as oil prices ticked upward, still contracted by 0.05 percent. Consequently, it will have to borrow $32 billion to plug its 2018 budget deficit.

The Saudi Arabian government first raised funds by issuing $17.5 billion worth of international bonds in 2016, the largest international bond sale by an emerging market, bypassing Argentina’s bond $16.5 billion bond sale that April. Saudi Arabia raised about $36 billion in 2017, $14 billion of which was from domestic bonds and $22 billion from international debt markets.

Hurdles remain

However, despite the Saudi led oil production cut that has helped draw down oil inventory levels and prop up prices, which have been trading in the low-to high $60s level for both global traded Brent crude and NYMEX-traded West Texas Intermediate (WTI) crude, the Saudi still have their plate full.

Their plan to pivot from an oil producing country into other industries is in its infancy, as the kingdom is still struggling to produce non-oil production revenue. It remains to be seen if the country’s increased deals to invest in downstream assets, mostly refining, in both the U.S., at home and other countries can offer the diversification that Saudi government coffers needs.

It also remains to been seen if bin Salman’s much-touted Vision 2030 (his plan to reduce Saudi Arabia's dependence on oil, diversify its economy, and develop public service sectors such as health, education, infrastructure, recreation and tourism) will produce the desired results he intends. Related: Saudi Officials Worried About Oil’s Future

At least in the short to mid-term, the Kingdom will have to do what is has done so well in the past, and now is waffling at; pump oil and try to sway global oil markets in the process. Of course, the quandary with that now decades old model is the upstart U.S. shale oil industry that just refuses to go away, no matter how much both the Saudis and Russia like to claim that they aren’t overly concerned about it.

Yet, the Saudis can still manufacture higher oil prices by playing the geopolitical angle. In essence, its increased geopolitical problems in the region and its proxy war against Iran in Yemen, Syria and possibly Iraq, and its harder stance against all things Tehran-related has brought back quantifiable geopolitical pressure on oil prices.

Just hawkish rhetoric coming out of the Saudi camp, particularly against Iran, can spook global oil markets, while any disharmony between Saudi Ababa and fellow-OPEC member Iran that could spill over into cancelling any renewal of the OPEC, non-OPEC production oil cut could unravel things completely.

Without an extension of the ongoing oil production deal, or something similar, by the end of 2018 oil markets could pivot back to being so severely oversupplied, also factoring in the U.S. reaching nearly 11 million bpd of oil production by the end of the year, that an argument could be made that a repeat performance of 2015 and 2016 could threaten on the horizon. Hopefully, for all concerned, that worst case scenario will not materialize.

By Tim Daiss for Oilprice.com

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