Fitch downgrades Saudi Arabia's sovereign bond rating

One of the world's three main ratings agencies downgraded Saudi Arabia's long-term sovereign debt as its analysts marked down their projections for the price of crude oil in 2016 and 2017, although the agency pointed out that the Kingdom's level of debt-to-gross domestic product continued to be much lower than that of its peers.

Fitch cut its sovereign debt rating from AA to AA- and kept a 'negative' outlook on its debt.

Its analysts also revised their price assumptions for the price of crude oil in 2016 and 2017 to $35.0 and $45.0 per barrel respectively.

Although Saudi was expected to sell down foreign financial assets to cover a large share of Riyadh's financing needs, it had also begun increasing debt domestically.

In parallel, the country was negotiating a syndicated $10bn loan and planning to tap in to the market for Eurobonds for the first time ever.

That would drive the government's debt-to-GDP ratio to 9.4% of GDP in 2017, versus 1.5% in 2014, Fitch said.

Nonetheless, that was still "low" compared with peers at 36.9%.

Even so, Saudi's bet foreign asset position was set to fall from 113% in 2014 to 78% of GDP in 2017, which was "considerably less" than half the comparable figures for other Persian Gulf nations such as Kuwait, Abu Dhabi or Qatar.

The current account deficit was also seen climbing from 8.2% of GDP in 2015 to 14.0% in 2016.

In a somewhat more positive light, Fitch also referenced press reports according to which Riyadh had embarked on fiscal reforms which would boost non-oil revenues of $100bn per year by 2020. Authorities were also expected to be cautious, seeking to avoid fiscal reforms that might have adverse social consequences.

"Even if fully implemented, the measures will not prevent a substantial erosion of fiscal and external buffers during 2016 and 2017, although the buffers will still be sufficiently high to constitute an important rating strength.2

Saudi Arabia's economy expanded by 3.4% in 2015 but was expected to register a slowdown to a 1.5% clip in 2016 and 1.7% in 2017.

"Monetary policy remains constrained by the peg to the US dollar, although this provides an important nominal anchor. Despite heightened speculation about devaluation, a change in the peg remains highly unlikely.

"Control over economic policy making has been concentrated in the hands of Prince Mohamed bin Salman, the deputy crown prince and son of the king who is also chairman of the Council on Economic and Development Affairs as well as defence minister. This may have contributed to an acceleration of the economic policymaking process, but has also reduced the predictability of decision-making. The degree of support for this accumulation of power from other parts of the royal family is uncertain."