The Daily Update - Saudi Arabia’s “resilience to very damaging shocks”

Earlier this week Moody’s revised its growth forecast for Saudi Arabia, to 0.3% in 2019; from its estimate of 1.5% at the beginning of the year. The rating agency cited the OPEC-led reduced production agreement as the main effect on government revenue. The rating agency currently has the Kingdom’s long-term rating at A1, in-line with Fitch, while S&P’s is at A-. Of note is that there has currently been no mention from the rating agencies on reviews to Saudi Arabia’s stable ratings. 

On the recent attacks, Moody’s says it does not expect the “temporary nature of disruptions” to have a “long-lasting impact on the government's credit profile”. Adding that the government’s ample $500bn fx reserves (which include gold - as at July) combined with its “strategic crude oil reserves” allow sufficient cushion for the economy, following the short-term production disruptions. The analyst at Moody's also highlighted the Kingdom’s “very well managed operations and disaster recovery processes” and “important degree of resilience to very damaging shocks”. 

According to sources, Saudi Arabia has restored oil output ahead of schedule, producing 11.3m barrels a day, with full production expected by the end of the month. Pre-attack supply levels to customers have been maintained, albeit different grades from various fields, as the Kingdom draws from its extensive oil inventories. Having endured a bit of a roller coaster over the past couple weeks, Brent is now trading at just above $62pb having spiked close to $72pb following the attacks. 

We could take a look at some of the bonds issued out of Saudi Arabia to get some feel for where the market stands. Since issue in April this year, Aramco’s 4.25% 2039 bond is up ~9 points. We calculate that the A1 rated bond offers sufficient credit notch protection, currently trading over 3 notches cheap and a very attractive return and yield above 16%. The longer-dated government issue, Saudi International 4.5% 2046, has bounced up ~3 points since the attack. Yielding 3.85% and offering an expected return of ~14% with 2.7 notches of protection this bond is currently up 20 points so far this year. Indeed Saudi bonds are trading lower from pre-attack level highs, however, once production is back to normal we expect sentiment to improve.

Saudi’s 5-year CDS currently sits at ~77, although it has bounced off the lows earlier this month, it is still way below the highs of ~110.9 in January. It appears to us that although the attacks on Saudi oil production will no doubt have some short-term effect on the economy, the Kingdom has sufficient firepower to overcome this hiccup, and fiscal scope (such an increase to VAT) to increase government revenues going forward; as further cushion is required. What will be interesting are the US-Iran developments, but as far as we understand the US and other western powers are willing to support Saudi Arabia, we just hope it can be done in a non-aggressive manner.

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