March 22, 2017 / 6:02 PM / 6 months ago

Fitch downgrades Saudi Arabia, doubts prospects of reform

DUBAI, March 22 (Reuters) - Fitch Ratings cut its assessment of Saudi Arabia’s credit quality on Wednesday, citing deterioration of state finances due to low oil prices and doubts over whether Riyadh can achieve its economic reform plans.

Prices of Saudi bonds stayed firm, however.

Fitch downgraded Saudi Arabia by one notch to A+ with a stable outlook from AA- with a negative outlook. It said that that while the leadership was strongly committed to diversifying the economy beyond oil, that intention might not be enough.

“In Fitch’s view, the scale of the reform agenda risks overwhelming the government’s administrative capacity,” the ratings agency said in a statement, .

It said planned hikes in domestic energy prices to cut the government’s subsidy burden could severely hurt energy-intensive industries, while higher fees for hiring foreign workers -- part of an effort to increase employment for Saudi citizens -- could undermine large parts of the private sector.

However, bond prices firmed, with the Saudi government’s U.S. dollar bonds maturing in 2021 yielding around 2.85 percent compared with a close of 2.897 percent on Tuesday. Its 2026 bonds traded at 3.66 percent against 3.726 percent.

A Lebanon-based trader said the downgrade was creating some activity in the bonds, but that the price changes were minimal.

Traders noted that Fitch’s downgrade merely brought its rating closer to the other two major rating agencies. Standard & Poor’s rates the kingdom A-, two notches below Fitch, while Moody’s has it at A1, level with Fitch.

All three agencies now have stable outlooks on Saudi Arabian debt, suggesting there is no imminent risk of any further downgrade.

In a statement responding to Fitch’s move, Saudi Finance Minister Mohammed al-Jadaan said the economy and the government’s balance sheet were fundamentally strong.

“The Saudi economy has structurally aligned itself to a lower oil price environment as reflected in a more sustainable balancing price for its fiscal and current accounts,” he said.

Financial market movements in the past few months suggest many investors agree. Measures of stress in the financial system have fallen sharply; this month the cost of insuring Saudi sovereign debt against default hit its lowest since September 2015. (Editing by Jeremy Gaunt)

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