Saudi Arabian government dollar bonds posted losses on Monday after the finance minister said Riyadh would have to take painful measures to deal with the impact of the coronavirus and Moody’s downgraded the country’s ratings outlook.
Moody’s cut Saudi Arabia’s outlook to negative from stable on May 3, citing higher fiscal risks due to the crash in oil prices and uncertainty about the government’s ability to offset oil revenue losses and stabilise its debt in the medium term.
By 07:36 GMT on Monday, Saudi Arabia’s 35-year bonds due in 2055 had lost 1.4 cents to trade at 89.8 cents on the dollar, while its 40-year bonds due in 2060 shed 1.6 cents to trade at 98.2 cents on the dollar, Refinitiv data showed.
The country saw steep losses on its other bonds as well, while most other sovereign bonds in the Gulf region saw smaller losses in early trade and some even strengthened marginally.
Saudi Finance Minister Mohammed al-Jadaan said on Saturday the government “must reduce budget expenditures sharply” and that the effect of the new coronavirus on Saudi Arabia’s state finances would be felt from the second quarter of the year.
Japan’s Mitsubishi UFJ Financial Group Inc (MUFG), in an analyst report on Monday, said large fiscal deficits could put pressure on the country’s credit rating and borrowing costs.
MUFG said it expected Saudi Arabia’s economy as measured by real gross domestic product (GDP) to contract 3.2 percent this year, its worst performance since 1999. It also forecast public debt would rise to 31.6 percent of the GDP – the highest since 2005 – and foreign reserves would fall by up to $47bn.
Saudi Arabia’s large capital buffers will allow it to weather low oil prices over the medium term, the bank said in its note, also commending the kingdom’s forward guidance to markets regarding its policy responses to the economic shock.
Saudi Arabia has imposed strict measures to stem the spread of the new coronavirus, including halting flights and imposing curfews.
As of Sunday, the kingdom had reported 27,011 cases of the new coronavirus and 184 deaths, both the highest among the six Gulf Cooperation Council countries.
MUFG said the Saudi riyal’s peg to the US dollar remained “bullet-proof” despite market fears over its long-term stability.
“While we expect the peg to be maintained, large fiscal deficits is likely to put pressure on the sovereign’s credit ratings and cost of funds, which could build vulnerabilities over the medium term,” the bank said.
An S&P Capital IQ model based on CDS prices currently shows markets pricing Saudi Arabia as BBB-, just one notch above “junk”, or sub-investment grade as it is formally known.
Saudi Arabia is rated A by Fitch, A2 by Moody’s and A- by S&P.
Saudi Arabia increased its debt ceiling to 50 percent of the GDP from a previous 30 percent in March and has already raised $12bn in international bonds this year.