Moody’s upgrades Saudi Arabia to Aa3; outlook stable

Moody's Investors Service has upgraded Saudi Arabia's foreign and local currency government ratings to Aa3 from A1 and the country ceiling for foreign currency bank deposits to Aa3 from A1. The country ceiling for foreign currency bonds, the local currency ceiling for bonds and the local currency bank deposit ceiling were confirmed at Aa3.
The outlook on the ratings is stable.
The upgrade was prompted by the continued strong state of government finances, which have largely withstood oil price volatility and the global economic crisis. A return in the budget to a moderate surplus — from an estimated small deficit in 2009 –will restore the Kingdom's debt trajectory back on its former improving trend, even with continued large-scale infrastructure spending.
Additional support to the rating comes from Saudi Arabia's banking system. It has demonstrated the ability to absorb and contain shocks emanating from the global financial crisis, Dubai and domestic corporate debt problems. The Kingdom's banking system is only one of a few globally to have maintained a stable outlook during the crisis.
The new rating is also underpinned by the Kingdom's external strengths. The current account balance has likely remained in surplus, and total reserve assets of the Saudi Arabian Monetary Agency, $410 bln at the end of 2009, are a multiple of government debt and probably exceeded the level of the Kingdom's GDP last year.
Moreover, state-owned Saudi Aramco's proven crude oil reserves — 264 bln barrels (annual production was 3 bln barrels in 2009) — are the largest of any national or private oil company.
"For Saudi Arabia's rating to move upwards, Moody's will assess prospects for the continued strength in public sector finances and the success of the government's infrastructure program in improving the country's long-term competitiveness and economic strength," said Tom Byrne, a Senior Vice President at Moody's.
In addition, further improvements in transparency in macroeconomic statistics would facilitate Moody's assessment of the Kingdom's credit fundamentals.
On the other hand, downward pressure on the rating would arise from a sharp, secular decline in oil prices, or an inefficient public expenditure program. Moody's, however, considers both scenarios as remote.
Moody's also considers event risks stemming from geopolitical uncertainties to be moderate, in line with other countries in the Middle East and some in East Asia, but — at the same time — more elevated than most rated countries.