Moody’s lifts Saudi Arabia’s local and foreign currency rating to Aa1

Credit rating agency Moody’s Investors Service has raised Saudi Arabia’s local and foreign currency rating to Aa1 from Aa2 on Friday, citing increased predictability of the government’s decision-making processes and policies affecting the private sector.

Foreign currency ratings refer to an entity’s ability and willingness to meet its foreign currency denominated financial obligations as they come due.

Local currency ratings refer to an entity’s ability and willingness to meet all its financial obligations on a timely basis, regardless of the currency in which those obligations are denominated and absent transfer and convertibility restrictions.

The change in rating reflects “increased predictability of policies and decision-making processes affecting non-government issuers given institutional improvements”, the New York-based credit rating company said in a statement.

The “zero-notch gap” between rating for the foreign currency and the local currency is aided by the central bank’s very large foreign exchange reserve and reflects very low transfer and convertibility risks, Moody’s added.

Saudi Arabia, the Arab world’s largest economy, has been focusing on diversifying its economy away from oil as part of its Vision 2030 agenda.

Its economy contracted in the first quarter of the year on the back of a slump in theoil sector, despite an expansion in non-oil activities during the period.

The kingdom’s real gross domestic product contracted by 1.8 per cent annually in the January-March period, according to flash estimates released by the General Authority for Statistics.

“This decrease was primarily driven by a 10.6 per cent decline in oil activities,” it said.

Non-oil activities increased by 2.8 per cent and government activities grew by 2 per cent on an annual basis.

The country has been reducing crude output along with other members of the Opec+ alliance as part of efforts to “balance the market”.

Brent crude, the benchmark for two-thirds of the world’s oil, fell by about 10 per cent in 2023 on higher-than-expected supply from non-Opec countries and concerns about crude demand.

Prices have gained more than 10 per cent this year, an increase driven in part by supply worries due to geopolitical tensions, along with the Opec+ output cuts.

However, fears of weak demand have been pulling down prices, as expectations rise that the US Federal Reserve will not be cutting interest rates soon due to persistently high inflation and strong job numbers.

Moody’s attributed reliance on a single revenue source for both the private and the government sector and challenging regional geopolitical dynamics for the “three-notch gap” between the local currency rating and the A1 sovereign rating.

Rating agency S&P Global in March affirmed Saudi Arabia’s sovereign rating and outlook betting on social and economic reforms to improve the country’s prospects.

Saudi Arabia also recently said it would adapt its Vision 2030 strategy to current economic and geopolitical challenges.

The kingdom would “downscale” or “accelerate” some of the projects being carried out under the programme, Saudi Arabia’s Finance Minister Mohammed Al Jadaan said at the special meeting of the World Economic Forum in Riyadh.

Updated: May 25, 2024, 8:53 AM