S&P Downgrades Saudi Arabia On Slumping Crude, Ballooning Fiscal Deficit

Tyler Durden's picture

Over the course of the last several months, the consequences for Saudi Arabia of deliberately keeping crude prices suppressed in an effort to, i) bankrupt uneconomic producers in the US, and ii) pressure Moscow into giving up Bashar al-Assad have begun to make themselves abundantly clear. 

Not only has the kingdom been forced into liquidating its SAMA reserves...

... but the pressure from simultaneously maintaining the riyal peg and preserving the standard of living for everyday Saudis has driven Riyadh back into the debt market in an effort to offset some of the pressure on the country’s vast store of USD-denominated petrodollar assets (see second pane below).

Meanwhile, the war in Yemen is also weighing on the budget and now, the Saudis are staring down a fiscal deficit that amounts to some 20% of GDP and the first current account deficit in years.

All of the above have caused to market to lose faith in Riyadh’s ability to keep the situation under control and now, S&P has downgraded the kingdom to AA- negative citing “lower for longer” crude and the attendant ballooning fiscal deficits. 

*  *  *

From S&P:

We expect the Kingdom of Saudi Arabia's (Saudi Arabia's) general government fiscal deficit will increase to 16% of GDP in 2015, from 1.5% in 2014, primarily reflecting the sharp drop in oil prices. Hydrocarbons account for about 80% of Saudi Arabia's fiscal revenues.

Absent a rebound in oil prices, we now expect general government deficits of 10% of GDP in 2016, 8% in 2017, and 5% in 2018, based on planned fiscal consolidation measures.

We are therefore lowering our foreign- and local-currency sovereign credit ratings on Saudi Arabia to 'A+/A-1' from 'AA-/A-1+'.

Standard & Poor's is converting its issuer credit rating on Saudi Arabia to "unsolicited" following termination by Saudi Arabia of its rating agreement with Standard & Poor's.

The outlook remains negative, reflecting the challenge of reversing the marked deterioration in Saudi Arabia's fiscal balance. We could lower the ratings within the next two years if the government did not achieve a sizable and sustained reduction in the general government deficit or its liquid fiscal financial assets fell below 100% of GDP.

*  *  *

Of course this will only get worse should Riyadh decide to launch a sequel to "Operation Decisive Storm" in Syria and indeed, the IMF recently warned that absent higher oil prices, the Saudis could literally go broke in the space of five years:

Sharply lower oil prices have significantly affected the fiscal prospects of oil exporters across MENA and the CCA.1 The Brent oil price is projected to average $53 a barrel in 2015, down from almost $110 a barrel in the first half of last year. Exporters’ fiscal balances have turned from sizable surpluses to large deficits, with MENA and CCA export revenues dropping by $360 billion and $45 billion, respectively, this year alone.



For oil exporters, the main policy issue is fiscal adjustment and rebuilding buffers over the medium term. The Brent oil price is projected to recover only modestly to about $66 a barrel by the end of the decade, with MENA and CCA export receipts remaining $345 billion and $30 billion, respectively, below the 2014 level, even in 2020. In the absence of adjustment, fiscal balances will remain in deep deficit in most countries, with public debt ratios rising rapidly (red lines in Figure 4.2). 



Even under the IMF baseline scenario, however, public debt ratios will continue to rise in many GCC and CCA exporters (blue lines in Figure 4.2). In a number of countries, mediumterm fiscal balances will fall well short of the levels needed to ensure that an adequate portion of the income from exhaustible oil and gas reserves is saved for future generations (Figure 4.3). Bahrain, Oman, and Saudi Arabia have medium-term fiscal gaps of some 15–25 percentage points of non-oil GDP, while conflict-torn Libya has a gap of more than 50 percent of non-oil GDP. 


The large and sustained drop in oil prices has increased fiscal vulnerabilities in MENA and CCA oil-exporting countries. The issue of fiscal space has become critical as oil exporters decide how quickly to adjust their fiscal policies to the new reality of persistently lower oil prices. This box considers several alternative measures of fiscal space. A good starting point is the size of governments’ financial assets—commonly referred to as “fiscal buffers.” In general, countries with larger buffers can afford to maintain fiscal deficits further into the future, so as to reduce the impact of lower oil prices on growth. On current trends, however, all non-GCC MENA oil exporters are already projected to run out of liquid financial assets in the next three years (see Chapter 1). In, contrast, CCA oil exporters have at least 15 years’ worth of available financial savings,1 while GCC countries are split evenly between countries with relatively large buffers (Kuwait, Qatar, and the United Arab Emirates—more than 20 years remaining) and countries with relatively smaller buffers (Bahrain, Oman, and Saudi Arabia—less than five years).

As a refresher, here's BofAML's sensitivity analysis which shows how long Riyadh's SAMA reserves will last under various scenarios for crude prices and debt issuance:

One important takeaway from the above is that if the Saudis were to burn through their reserves it would represent a nearly $700 billion global liquidity drain as Riyadh dumps its USD-denominated assets. That would amount to a complete reversal of the petrodollar virtuous circle that's underwritten decades of dollar dominance and which has served to underpin the global economic order for as far back as most market participants can remember. 

And while it's by no means a foregone conclusion that oil prices will remain "lower for longer" as the Saudis are to a certain extent the masters of their own destiny in that regard, one thing worth noting is that not only is Iranian supply set to come back online, but Tehran seems determined to supplant Riyadh as regional power broker. Both of those eventualities will have very real consequences for crude prices and thus for the future of The House of Saud.

So enjoy it while it lasts King Salman...

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Raymond_K._Hessel's picture
Raymond_K._Hessel (not verified) Oct 30, 2015 2:34 PM



thecondor's picture

They will hold out till the end of the year and then prices will go back up to $75 by summer. 

thesonandheir's picture

This will hit the Saudis hard. King Salman can only affford to buy 364 golden Rolls Royces this year.

ChooChoo's picture

For some reason i read that on an Al pacino voice (Tony Montana)

Raymond_K._Hessel's picture
Raymond_K._Hessel (not verified) ChooChoo Oct 30, 2015 4:16 PM


Try a Christopher Walken voice... it is unduly pleasing.

playdoh's picture

The result of decreasing military spending on US weaponary?

RopeADope's picture

Standard & Poor's is lowering its issuer credit rating on Saudi Arabia following termination by Saudi Arabia of its rating agreement with Standard & Poor's.

surf0766's picture

"We expect the Kingdom of Saudi Arabia's (Saudi Arabia's) general government fiscal deficit will increase to 16% of GDP in 2015, from 1.5% in 2014"


We are over 100% and we are still AAA  WTF

HowdyDoody's picture

The S&P rating is directly proportional to the fee paid.

replaceme's picture

The Russians are cutting into their franchise expansion plans.

Bunghole's picture

The entire House of Saud can choke on a bag of pork dicks.

Omega_Man's picture

heads will role....

cowdiddly's picture

I don't guess those Houthi rockets falling into south Saudi Arabia @Najran city this morning helped much either.

Sheiks got your plane res?

TeaClipper's picture

I am sure the Saudi Royal family will enjoy their exile on the Bush ranch, and lets face it, you couldnt find two families that deserve each other more

CHoward's picture

TODAY was the 1st day in MANY YEARS that I could buy gas for less than $2.00 per gallon!  Bought $5.00 just because.

bamawatson's picture

that will buy you a house in detroit

nakki's picture

Seem like their in a much better spot than every other country on the planet. What a fucking farce these rating agencies are. 

Hannibal's picture

To the US Military – Regarding your oath:

(You know what needs to happen. It’s time to take out the trash!)

I, _____, having been appointed an officer in the Army of the United States, as indicated above in the grade of _____ do solemnly swear (or affirm) that I will support and defend the Constitution of the United States against all enemies, foreign and domestic, that I will bear true faith and allegiance to the same; that I take this obligation freely, without any mental reservations or purpose of evasion; and that I will well and faithfully discharge the duties of the office upon which I am about to enter; So help me God.”


OldPhart's picture

To those no longer in service...as you know, we were never relieved of that oath.

Nobody For President's picture

Yep - I remember that from time to time...

chinoslims's picture

If their goal is to destroy their competition,  they are doing it right.  what good are reserves if yields are shit.  They are leveraging debt to kill the debt of the desperate shale/fracking industry.  

NubianSundance's picture

Only 80% of Saudi GDP is oil derived? Surely nearer 90%.

scatha's picture

People are puzzled why Saudis seemingly shoot themselves in the foot by sabotaging the price of crude oil by destroying their budget.

They are not. They, as well as Russia and China, understood that this is a collapse of global demand stupid they are facing. Yes, secular decline of global demand and hence for Saudis to protect their market share they have to kill North/South american competition, since Russian and Iranian competition in Asia is impossible to beat because it is a derivative of  political not as much as economic relations especially when yuan becomes world reserve currency. The yuan crude oil benchmark and exchange is coming soon.

In this context Yemen adventure is an outcrop of internal strive within Saudi royalty, consisting of strong Yemeni branch as well as negotiating tool in secret talks with Iran being currently enticed to return to western sphere of influence so far with no avail.

More on the China, Saudis and the collapse of global trade can be found at:



And here is the truth about what Saudi Arabia really is:



Niall Of The Nine Hostages's picture

The ratings agencies are always the last to know when a country is on the ropes financially. Put it this way---Detroit bonds were investment grade until 2005. 

Saudi Arabia took the suicidal step of declaring war on Russia. They will lose, the House of Saud will be overthrown, and everyone daft enough to lend Riyadh their own money will lose the lot---and will deserve to.

Aleedsfella's picture

Who gives a fuck about S&P? they are just more cock sucking bankers!