Saudi shrugs off succession worries, but oil in focus


Lower oil prices not political risk the focus for Saudi's credit profile says Fitch

Lower oil prices, not political risk, is the focus this year for Saudi Arabia’s credit profile, after the smooth succession following King Abdullah’s passing. 

The clear succession process reduces the risk of political uncertainty and suggests broad continuity in economic and social policy, Fitch Ratings has said in a note.

The Saudi stock market rallied on Monday by 0.7, despite a sell-off seen in other bourses in the region, reflecting a sense of relief among investors with regards to the smooth succession. Reuters reported analysts as saying the succession could in fact benefit stock markets because the new ruler would be pressured to take populist steps in the form of increased state-sector wages, more spending on infrastructure and defense, which could help consumer spending.

There could be measures to “renew the social contract”, investment bank Exotix was quoted by Reuters as saying.

“It looks like King Salman has moved to secure the line of succession to the new generation by appointing Bin Nayef as deputy crown prince,” Emad Mostaque, a strategist at Ecstrat in London, told Bloomberg. “It’s very positive that they’ve handled possible transition to the next generation with aplomb and that’s likely a key reason oil prices are stabilizing.”

King Salman had, with immediate effect, nominated Prince Muqrin as crown prince and Prince Mohammed bin Nayef as deputy crown prince, the first from the third generation of the royal family to be formally included in the line of succession.

Speaking to TRENDS on the sidelines of the World Economic Forum (WEF) in Davos, Amr Moussa, the former Secretary-General of the Arab League had also expressed satisfaction at the smoothness of the handover process. “As expected, the succession has been peaceful,” he said.

With succession worries largely behind us, the focus will once again shift to oil prices, and the policy responses to it Fitch has said.  While the kingdom’s large financial reserves supports Fitch’s AA/Stable credit rating for Saudi Arabia, the agency says that the fall in oil prices will cause fiscal metrics to deteriorate in 2015.

“Our forecast of an average oil price of $70/bbl (Brent) in 2015 implies a deficit of seven percent of GDP, assuming some reduction in spending. If prices stay around current levels, averaging $50/bbl, the deficit would more than double to 16 percent of GDP unless spending is cut further”

Saudi Arabia has announced no cuts in subsidy spending or measures to increase tax revenues in its budget. The 2015 capex has been reduced, but Fitch believes more reductions are possible.

“The size of the deficit will also be influenced by our expectation that Saudi Arabia will lower oil production this year as part of a wider Opec cut. Our forecast contraction in real GDP of 1.7 percent this year also assumes a blow to the confidence of a private sector increasingly reliant on high government spending.

“A higher deficit could be financed comfortably by drawdowns from the sovereign’s very large stock of foreign assets rather than increasing debt. Foreign reserves fell by approximately $5 billion in the three months from August, but at an estimated 113 percent of GDP at end-2014, sovereign net foreign assets remain among the highest for all Fitch-rated sovereigns” the note added.




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