Rating agency Fitch downgraded Saudi Arabia’s credit rating to A from A+ on Monday, citing rising geopolitical and military tensions in the Gulf following an attack on its oil facilities and a deterioration of the kingdom’s fiscal position.
The Saudi finance ministry said it was disappointed by the “swift” downgrade and urged Fitch to reconsider it, arguing the move did not reflect the kingdom’s response to the September 14 attack or its capacity to handle adversity.
The move – which places Saudi Arabia one notch above the assessment of peer rating agency S&P Global – is a blow to the largest Arab economy as it seeks investment to diversify away from oil and prepares a potential international sale of United States dollar-denominated Islamic bonds.
Monday’s downgrade by Fitch follows an unprecedented attack on Saudi oil plants on September 14 which initially slashed crude production of the world’s largest oil exporter by around half. Riyadh blamed regional arch foe Iran, a charge Tehran denies.
But the attack laid bare the vulnerabilities of the kingdom’s oil infrastructure network.
“In our view, Saudi Arabia is vulnerable to escalating geopolitical tensions given its prominent foreign policy stance, including its close alignment with US policy on Iran and its continued involvement in the Yemen war,” Fitch said on Monday.
The agency sees a risk that the US and Saudi Arabia could be drawn into a deeper conflict with Iran or its allies.
“Although oil production was restored fully by end-September, we believe that there is a risk of further attacks on Saudi Arabia, which could result in economic damage.”
Saudi officials have said the September 14 attacks would not affect state finances or growth, but investors and analysts said it could have a long-term impact on ambitious plans to diversify the Saudi economy and attract foreign capital.
“We have revised our assessment of the vulnerability of Saudi Arabia’s economic infrastructure to regional military threats as a result of the most recent attack,” Fitch said.
Fitch is the first agency to change Riyadh’s credit rating – used by investors to assess the level of risk associated with a debt issuer – since the attacks, the most dramatic of several incidents this year stirring Iranian-Saudi tensions.
S&P Global Ratings last week affirmed its A- (minus) rating, saying however that its rating could come under downward pressure should the country’s oil infrastructure undergo repeated foreign attacks.
Ratings agency Moody’s, which cut its 2019 forecast for Saudi economic growth to 0.3 percent from its previous projection of 1.5 percent following the September attacks, though said it was largely due to an overall decline in oil production.
Moody’s senior analyst Alexander Perjessy said last week the attacks, assuming the disruption was temporary, would have no impact on the rating.
Fitch’s downgrade comes in advance of a planned issue of international Islamic bonds by the kingdom, and the rating move could potentially affect the cost of Saudi Arabia’s debt issue.
“The dollar sukuk would be a good test to see if pricing has been impacted, albeit slightly given that S&P last week kept its rating untouched,” said John Sfakianakis, chief economist at Gulf Research Center.
The downgrade also comes as state oil giant Aramco presses ahead with its initial public offering (IPO) plans, a pillar of Crown Prince Mohammed bin Salman‘s diversification drive.
Fitch gave Aramco a rating of A+ in April, when the oil producer for the first time disclosed its finances ahead of an inaugural bond issue.
The rating agency said at the time it put Saudi Aramco’s “standalone credit profile [at] ‘AA+'”, adding that its rating was “capped by that of Saudi Arabia in view of strong linkage between the state and the sovereign”.