Saudi domestic sukuk issuance program gets (P)A1/Aaa.sa rating by Moody’s

Moody's Investors Service assigned a provisional (P)A1 senior unsecured MTN global scale rating (GSR) and Aaa.sa senior unsecured national scale rating (NSR) to the Saudi government's domestic SAR-denominated sukuk issuance program.

Moody's also assigned a A1/Aaa.sa senior unsecured GSR/NSR to the most recent sukuk instrument issued under that program.

The government of Saudi Arabia's A1 GSR is underpinned by its robust, albeit deteriorating, balance sheet and supported by substantial external liquidity buffers.

“The instruments issued by the government under the program warrant the strongest Aaa.sa rating by virtue of the sovereign's large footprint in the economy and its capacity to control and/or influence economic, political, and social matters; and its large financial buffers, including forex (FX) reserves in the central bank and a robust, albeit deteriorating, balance sheet,” the rating agency added.

As a major oil exporter, Saudi Arabia's environmental risks are predominantly derived from carbon transition. Under a scenario similar to the International Energy Agency's (IEA) Stated Policies scenario of a gradual slowdown and eventually fall in hydrocarbon demand, Saudi Arabia's credit profile would face downward pressure, although only over the longer-term with sizeable buffers to provide support.

Saudi Arabia is also one of the world's 10 most arid states, and rapid growth in recent decades has further increased challenges surrounding water sustainability. The majority of the Kingdom's water is produced by desalination plants, which are highly energy intensive.

With the local population forecast to continue to grow rapidly, no improvement in water consumption efficiency could create additional fiscal pressure and/or growth constraints.

Social risks are material for Saudi Arabia's credit profile. Moody's expects that labor market nationalization policies and economic diversification efforts will over time help to reduce the unemployment rate for the nationals (12% in Q4 2019).

However, these policies may fall short should labor force growth outpace increased availability of jobs in the private sector. In addition, Moody's regards the coronavirus outbreak as a social risk under Moody's ESG framework, given the substantial implications for public health and safety.

Governance risks have a balanced positive impact on Saudi Arabia's credit profile, balancing ongoing improvements in government effectiveness, control of corruption and regulation against weaknesses related to civil society and judiciary, Moody’s explained.

While the agency acknowledges progress in the past two years on improving economic and financial data transparency and availability, the remaining challenges primarily relate to poor disclosure on the financial performance and debt levels of government-related entities.