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Charles Kennedy

Charles Kennedy

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Saudi Arabia Loses Top Credit Rating from Moody’s

Low oil prices continue to take a toll on oil producers in the Middle East. The latest sign of trouble comes from Moody’s Investors Service, which cut its credit rating for Saudi Arabia, Oman and Bahrain.

Saudi Arabia saw its credit rating slashed by one notch from Aa3 to A1, while Oman suffered a cut to Baa1 and Bahrain’s score was reduced to Ba2. For Saudi Arabia, the rate cut was the first from Moody’s since the ratings agency began tracking its credit more than two decades ago. But it joins the other two major ratings agencies, S&P and Fitch, which already knocked Saudi Arabia off its top perch earlier this year. Related: Falling Chinese Demand Could Intensify The Oil War

The Saudi government is in the midst of an austerity campaign, cutting spending to reduce a $100 billion budget deficit. It has also gone to the bond markets to raise funds from international lenders, successfully borrowing $10 billion in March.

Moreover, in order to address the weakening economy while still maintaining the stability of its currency, the central bank has burned through over $155 billion in cash reserves since 2014, pushing its reserves below $600 billion as of March. Moody’s expects the cash reserves to continue to decline for the next several years, falling to just $460 billion by 2019.

“A combination of lower growth, higher debt and smaller domestic and external buffers leaves the kingdom less well positioned to weather future shocks,” Moody’s said on May 14. Related: Oil Markets Balancing Much Faster Than Thought

That assessment is exactly why the powerful Deputy Crown Prince Mohammed bin Salman is working on a major overhaul of the Saudi economy. The “Vision 2030” calls for new sources of non-oil revenue, privatizing part of Saudi Aramco, and using the proceeds to seed a $2 trillion sovereign wealth fund that will make investments in a diversified economy.

Moody’s said that these measures would improve the country’s creditworthiness, but that since the plans are still in the early stages, the “impact remains unclear.”

By Charles Kennedy of Oilprice.com

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