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Saudi Arabia's Credit Risk Easing and Regional Analysis Summary

Core Content

This document from Moody's Analytics provides an analysis of Saudi Arabia's credit risk and its implications for the Middle East & Africa region, as well as a summary of credit risk trends across various countries in the Asia-Pacific and Europe regions.

Main Points

Saudi Arabia's Credit Risk

• Oil Price Impact: Saudi Arabia, one of the world's largest oil producers, experienced a rise in market-based credit risk measures in January 2016 due to the sharp decline in oil prices.
• Oil Revenue Dependency: Over 80% of the country's revenue comes from energy exports, making it highly vulnerable to oil price fluctuations.
• Improvement in Credit Risk: The five-year Sovereign EDF (Expected Default Frequency) metric improved from 0.69% on January 18 to 0.38% by April 22, reflecting a decline in credit risk.
• Liquidity Pressures: Despite the easing in credit risk, the country faces liquidity challenges due to prolonged low commodity prices.
• Interest Rates: The three-month Saudi Interbank Offered Rate rose to 1.73% in February, its highest level in six years.
• Economic Reforms: The government announced plans to reduce reliance on oil, including the creation of a $2 trillion sovereign wealth fund and an IPO for Aramco.
• International Loans: A $10 billion loan from international banks was expected to help reduce the budget deficit and improve credit risk.
• Market Reactions: The CDS spreads tightened from 154 bp to 150 bp, and the stock market rose by 4.4% over the same period.

Regional Credit Risk Trends

Middle East & Africa

• The overall credit risk sentiment for the region eased.
• Saudi Arabia's Sovereign EDF decline was a significant factor in this improvement.
• The region's bond-implied rating remained at Baa1, while the average CDS-implied rating improved from Ba3 to Ba2.

Asia-Pacific

• Australia: Sovereign EDF (5-Year) decreased slightly, and the bond-implied rating remained stable at Aaa.
• China: Sovereign EDF (5-Year) showed a minor decrease, and the bond-implied rating improved from A3 to A2.
• Hong Kong: Sovereign EDF (5-Year) decreased, and the bond-implied rating remained stable.
• Indonesia: Sovereign EDF (5-Year) decreased, and the bond-implied rating remained stable.
• Japan: Sovereign EDF (5-Year) decreased, and the bond-implied rating improved from A3 to Aa1.
• Korea: Sovereign EDF (5-Year) decreased, and the bond-implied rating improved from A3 to Aa2.
• Malaysia: Sovereign EDF (5-Year) decreased, and the bond-implied rating remained stable.
• Vietnam: Sovereign EDF (5-Year) decreased, and the bond-implied rating remained stable.

Europe

• Austria: Sovereign EDF (5-Year) decreased, and the CDS implied rating remained stable.
• Belgium: Sovereign EDF (5-Year) decreased, and the CDS implied rating improved.
• Bulgaria: Sovereign EDF (5-Year) decreased significantly, and the CDS implied rating improved.
• Croatia: Sovereign EDF (5-Year) decreased, and the CDS implied rating improved.
• Denmark: Sovereign EDF (5-Year) remained stable, and the CDS implied rating slightly improved.
• Estonia: Sovereign EDF (5-Year) decreased, and the CDS implied rating slightly improved.
• Finland: Sovereign EDF (5-Year) decreased, and the CDS implied rating slightly improved.
• France: Sovereign EDF (5-Year) decreased, and the CDS implied rating improved.
• Germany: Sovereign EDF (5-Year) decreased, and the CDS implied rating remained stable.
• Greece: Sovereign EDF (5-Year) increased significantly, and the CDS implied rating declined.
• Hungary: Sovereign EDF (5-Year) decreased, and the CDS implied rating remained stable.
• Iceland: Sovereign EDF (5-Year) decreased, and the CDS implied rating slightly improved.
• Ireland: Sovereign EDF (5-Year) decreased slightly, and the CDS implied rating remained stable.
• Italy: Sovereign EDF (5-Year) decreased, and the CDS implied rating improved.
• Latvia: Sovereign EDF (5-Year) decreased slightly, and the CDS implied rating improved.
• Lithuania: Sovereign EDF (5-Year) decreased, and the CDS implied rating improved.
• Netherlands: Sovereign EDF (5-Year) remained stable, and the CDS implied rating slightly declined.
• Norway: Sovereign EDF (5-Year) slightly increased, and the CDS implied rating declined.
• Poland: Sovereign EDF (5-Year) slightly increased, and the CDS implied rating slightly declined.
• Portugal: Sovereign EDF (5-Year) increased, and the CDS implied rating slightly declined.
• Romania: Sovereign EDF (5-Year) decreased slightly, and the CDS implied rating remained stable.

Key Information

• Sovereign EDF: A measure of the expected probability of default over a five-year period.
• CDS Spreads: Credit Default Swap spreads reflect market perception of credit risk.
• Bond Implied Ratings: Reflect the market's assessment of a country's creditworthiness based on bond yields.
• Senior Ratings: Ratings provided by Moody's Investors Service, separate from market-based measures.
• Economic Diversification: Saudi Arabia's economic reforms aim to reduce reliance on oil.
• Liquidity and Budget Deficit: Despite improved credit risk, liquidity pressures persist.

Conclusion

The report highlights the easing of credit risk for Saudi Arabia and other countries in the Asia-Pacific and Europe regions, driven by economic reforms, international loans, and improved market sentiment. However, it also notes the ongoing challenges, particularly for countries with high dependence on oil and those facing budget deficits. The overall trend suggests a cautious optimism in the credit markets, with some regions showing improvement and others remaining stable or experiencing slight declines.