Saudi credit faces greater challenges than UAE, Qatar and Kuwait

  • Fisch Asset Management: Saudi deficit expected to be approximately 13% of GDP in 2016
  • Saudi Arabia likely to be downgraded in the next 18 months
  • Fisch highlights substantial oil reserves, well-capitalised banking system and economic reform programme as fundamental strengths
  • I-CV issues independent ratings of BBB for DP World (UAE) and Equate Petrochemicals (Kuwait)
Peter Jeggli, Senior Portfolio Manager and Head Research at Fisch Asset Management
Peter Jeggli, Senior Portfolio Manager and Head Research at Fisch Asset Management

Fisch Asset Management, one of the leading credit analysis and convertible bond specialists, indicates that cost-cutting pressure and declining government investments in Saudi Arabia will put pressure on medium-term growth. A credit report by Independent Credit Review (I-CV), a subsidiary of Fisch, states that austerity, privatization and taxation measures in the Kingdom will not be sufficient to reduce the deficit to the desired extent in the stated timeframe. The report affirms a rating of A- for Saudi Arabia’s sovereign credit, with the expectation that rating agencies will downgrade the Kingdom by 1-2 notches over the next 18 months. Such a likelihood would be reinforced by a slowdown in the oil price recovery or signs that domestic reforms are taking longer than timetabled.

The study states that compared with the UAE, Qatar and Kuwait, Saudi Arabia faces the greatest economic challenges. Its fiscal break-even oil price in 2015 was $95, versus an average of $74 for its peer group. A 35% reduction in expenditures at an oil price of $35/barrel or a 20% reduction at $50/barrel would be required to achieve a balanced budget for 2016. This leads to the expectation that Saudi Arabia will record a deficit of approximately $80-90 billion (13% of GDP).

Peter Jeggli, Senior Portfolio Manager and Head Research at Fisch Asset Management, commented:

“Despite pressure on its credit rating, the Kingdom retains a number of key strengths. It has exceptionally large oil reserves and as the world’s largest producer it has traditionally been able to influence supply and pricing in the global market. The country’s oil reserves have a life expectancy of at least 70 years, which is a long time in economic terms. Saudi Arabia’s substantial foreign currency reserves give it considerable flexibility, while the government still has a relatively low level of debt. The country has a stable and adequately capitalized banking system, albeit with rising credit default rates, and a strong relationship exists between the government and the banks. Perhaps most importantly, sweeping cost-cutting and restructuring measures driven by Vision 2030 and the National Transformation Plan will play a vital role in economic diversification. We look forward to seeing these come to fruition.”

In addition, I-CV published corporate credit reviews on DP World (UAE) and Equate Petrochemicals (Kuwait) rating both companies as BBB credits.  According to the review, DP World’s positive trend of the past few years has been compromised by the low oil price environment. However, with parent company Dubai World on a positive track with extension of its debt maturities from 2018 to 2022, pressure on DP World has eased. The strong ownership structure of Equate Petrochemicals (Dow Chemical and government-controlled Petrochemical Industries), along with the company’s strategic relevance to the Kuwaiti economy is highlighted as a key strength.

Peter Jeggli concluded:

“Operationally, DP World is making steady progress with its capacity expansion and is regularly tapping into new markets, with a recent focus on Africa. In view of these factors and despite DP World’s relatively cyclical field of business, the rating of the company as a solid BBB credit remains unchanged. Meanwhile, Equate Petrochemicals operates in a volatile but lucrative niche as a supplier to the chemical industry and generates attractive margins thanks to good conditions from suppliers as well as a lean cost base. The company’s strong shareholder support is enhanced by its solid risk profile with ample financial leeway. This is why we view the Equate rating as a firmly anchored credit in the BBB category.”

About Fisch Asset Management:

Independence and growth have been Fisch Asset Management’s hallmarks since its foundation by Kurt Fisch and Dr. Pius Fisch in 1994. The Company’s independence rests on the ownership of all shares in Fisch Asset Management AG lying with the Executive Committee and employees. Since foundation, Fisch Asset Management has grown to 77 colleagues, including one of the world’s largest convertible bond teams. The Company specialises in credit research and analysis, with an exceptional record in convertible, high yield and corporate bond strategies. Assets under management (AuM) total more than USD 9.8 billion, as at 30th September 2016. As a licensed securities dealer, the Company is regulated by the Swiss Financial Market Supervisory Authority (FINMA). Fisch Asset Management is a signatory of the United Nations Principles for Responsible Investment (UN PRI).

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