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LONDON, Oct 8: Moody’s Investors Service, (“Moody’s”) has assigned a Aaa.sa long term issuer national scale rating (NSR) to Saudi Arabian Oil Company (Saudi Aramco). Saudi Aramco’s A1 long term issuer global scale rating (GSR) is unchanged. The rating outlook is negative in line with the negative outlook on the Government of Saudi Arabia’s A1 rating.
Saudi Aramco’s Aaa.sa NSR reflects the company’s position as the strongest rated corporate in Saudi Arabia and one whose credit profile is very closely interlinked with the credit quality of the Government of Saudi Arabia.
The integrated oil & gas company benefits from an exceptional operational scale, significant downstream integration and strong financial flexibility given its low cost structure and low leverage relative to cash flows.
This provides resilience through oil price cycles. At the same time, credit linkages to the Government of Saudi Arabia are significant. Saudi Aramco is expected to remain largely under government ownership with the government’s budget highly reliant upon contributions from the company in the form of royalties, taxes and dividends.
Factors that could lead to an upgrade or downgrade of the rating
Saudi Aramco’s NSR is already at the highest rating level possible. Saudi Aramco’s A1 GSR is constrained by the A1 long term issuer rating of the Government of Saudi Arabia given the broad credit linkages between the two. Excluding credit linkage considerations with the sovereign, we see the company’s fundamental profile as significantly stronger than an A1 rating and therefore an upgrade of the sovereign rating would likely lead to an upgrade of Saudi Aramco’s GSR if it maintains its prudent financial policies.
A downgrade of Saudi Aramco’s GSR might potentially lead to a downgrade of its NSR unless the NSR mapping was simultaneously recalibrated, as would be likely if the Government’s GSR was also downgraded. Even in such a scenario Saudi Aramco would likely remain one of the very strongest domestic companies so its Aaa.sa NSR might prove highly resilient to one or more GSR downgrades. Moody’s Investors Service, (“Moody’s”) has assigned a provisional (P)A1 senior unsecured MTN global scale rating (GSR) and Aaa.sa senior unsecured national scale rating (NSR) to the Government of Saudi Arabia’s domestic SAR-denominated Sukuk Issuance Program.
Moody’s has concurrently assigned a A1/Aaa.sa senior unsecured GSR/NSR to the most recent sukuk instrument issued under that program. The (P)A1 program rating and A1 sukuk instrument rating mirror the Government of Saudi Arabia’s A1 issuer GSR. The Government of Saudi Arabia’s A1 GSR is underpinned by the government’s robust, albeit deteriorating, balance sheet and supported by substantial external liquidity buffers. The payment obligations associated with the sukuk instrument and any future instruments under the program are direct obligations of the Government of Saudi Arabia, ranking pari passu with all other unsecured indebtedness of the Government of Saudi Arabia and the holders of the Sukuk are therefore effectively exposed to Saudi Arabia’s senior unsecured credit risk.
The (P) A1 program and A1 sukuk instrument GSRs map to the Aaa-Aa1 range on the NSR scale published on Oct 2, 2020. In Moody’s view, 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 FX reserves in the central bank and a robust, albeit deteriorating, balance sheet. Moody’s notes that its program and instrument ratings do not express an opinion on the structure’s compliance with the Shariah law.
Environmental, social, governance considerations
As a major oil exporter, Saudi Arabia’s environmental risks are predominantly derived from carbon transition (see “Sovereigns – Hydrocarbon exporters: Carbon transition manageable for most; significant credit pressure in event of more ambitious transition”, 3 July 2018).
Under a scenario similar to the International Energy Agency’s 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 and with sizeable buffers to provide support. Saudi Arabia is also one of the world’s ten most arid states, and rapid growth in recent decades has further increased challenges surrounding water sustainability.
The majority of Saudi Arabia’s water is produced by desalination plants, which are highly energy intensive. With Saudi Arabia’s 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 percent in the fourth quarter of 2019). However, these policies may fall short should labor force growth outpace increased availability of jobs in the private sector