In addition to sagging oil prices and political risk, investors in Saudi Arabia now have a new source of uncertainty: widely different views of the kingdom from the world’s three major credit rating agencies.
Last week Standard & Poor’s cited the damage to Saudi state finances from low oil prices when it cut the kingdom’s long-term sovereign credit rating by two notches to A-minus, with a stable outlook, from A-plus.
That left a big gap between S&P and Moody’s, which has Saudi Arabia three notches higher at Aa3, with a stable outlook. The gap is even larger with Fitch Ratings, which has Saudi Arabia four notches higher at AA and a negative outlook.
Of over 100 sovereign issuers rated by the three agencies, only a few currently have ratings in such a wide range.
The divergence matters because many international investors are limited by internal rules to buying debt with certain minimum ratings. Some use the sovereign ratings to make decisions on allocating money outside the debt markets.
Saudi Arabia is preparing to start issuing sovereign international bonds this year to help cover its budget deficit. Success may to some extent depend on whether the ratings divergence persists, or whether the other agencies follow S&P’s lead.
Sergey Dergachev, senior portfolio manager for emerging market debt at Union Investment Privatfonds in Germany, said uncertainty over rating agencies’ intentions had become a major factor for investors in Saudi and Gulf Arab debt.
“Overall, my sense is that rating agency risk is very high in the eyes of investors, since in the last few months several decisions of all three agencies have been sudden ...
“Heavy rating cuts can lead to increased volatility, forced selling and heavy impacts in benchmark weights.”
Statements by the agencies show they have been making different assumptions about future oil prices and the ability of the Saudi economy to keep growing in an era of cheap oil.
In January S&P lowered its assumption for the average Brent crude price by about $20 a barrel to $40 in 2016, with a gradual increase to $50 in 2018 and beyond.
That is very different from the figures which Fitch has used; it said in a report on Saudi Arabia last September that it expected Brent to average $75 in 2016 and $80 in 2017.
Anita Yadav, head of fixed income research at Emirates NBD, Dubai’s biggest bank, said she was surprised S&P had acted so quickly in response to the latest oil price fluctuations.
“The actual downgrade is not surprising but the timing is,” “Although we understand the rationale, we don’t think there was any hurry to change the rating now on the back of oil prices - oil is a cyclical commodity.”
The agencies also differ in the extent to which they think Saudi Arabia can maintain economic growth as it cuts spending to curb its budget deficit. S&P expects gross domestic product growth to drop to 1.2% in 2016 from 3.4% in 2015.
In a report last week, Moody’s forecast growth of around 1.5%, saying Riyadh could offset the impact of budget cuts by raising oil production.
Another difference is that S&P’s rating of Saudi Arabia is “unsolicited”; last year, the Finance Ministry said it had terminated its rating agreement with S&P. Moody’s and Fitch have kept commercial ties with the kingdom.
Some fund managers said this might have contributed to the divergence in ratings by depriving S&P of direct access to Saudi officials. S&P says its unsolicited ratings are assigned “with no issuer participation and/or no access to internal documents”.
“We will only rate on an unsolicited basis if we believe that we have access to sufficient public information of reliable quality to support our analysis and ongoing surveillance, and also if we believe there is significant market interest in this unsolicited rating,” S&P said in response to a Reuters query.