S&P upgrade seen for Saudi as reserves swell

The headquarters of Saudi Arabia’s central bank in Riyadh. Total reserves at the Saudi Arabian Monetary Agency including cash and gold swelled to 2.7tn riyals ($720bn) at the end of January.

Bloomberg

Dubai

Saudi Arabia is poised for a sovereign upgrade from Standard & Poor’s as central bank reserves for Opec’s biggest member swell to the most in at least five years.

That is the view of financial institutions including Credit Agricole Private Banking, Commerzbank and Riyadh-based MASIC, which said a boost by the ratings company may spur bond sales from the Arab world’s biggest economy. Credit default swaps for Saudi Arabia, rated AA- at S&P, were 63 basis points March 12, almost three basis points below higher-rated Qatar.

Dollar-denominated debt from Saudi Electricity Co to Saudi Basic Industries Corporation rose after Fitch Ratings upgraded the country March 7. Total reserves at the central bank including cash and gold swelled to 2.7tn riyals ($720bn) at the end of January.

The world’s biggest oil exporter is benefiting from prices that have averaged almost $100 a barrel over the past year.

“I don’t understand why the country has been AA- for so long,” Christiane Nasr, investment advisor at Credit Agricole Private Banking, said in an interview in Dubai. There is nothing to justify the rating, she said.

Economic growth in Saudi Arabia is forecast to be 4.4% in 2014, up from 3.6% last year, according to data compiled by Bloomberg.

S&P, which placed Saudi Arabia on positive outlook in May, is scheduled to publish an updated view of the country on June 6, according to the company’s website. No one at S&P was immediately able to comment when contacted by Bloomberg News on Wednesday.

“If there is any country in the emerging markets today that could command an even higher rating than where it is now, it is Saudi Arabia,” John Sfakianakis, chief investment strategist at investment company MASIC, said by phone on Wednesday. The “belated” upgrade from Fitch recognized the country’s almost non-existent debt level, solid economic growth, sound fiscal policy and very high foreign reserves, he said.

Total reserves at the Saudi Arabian Monetary Agency, the kingdom’s central bank, haven’t been as high since at least 2009, according to data on its website.

The yield on Saudi Electricity’s $1bn sukuk due April 2023 fell three basis points since the Fitch upgrade to 3.91% on Wednesday, according to data compiled by Bloomberg. The yield on Sabic’s $1bn bond due October 2018 declined two basis points in the period to 2.57%.

An S&P upgrade would be positive “but will not make much difference to high-quality credits,” Apostolos Bantis, a credit analyst at Commerzbank, said by phone from London on Wednesday. “At that level the spreads don’t move much.” A higher rating may spur new international sales, according to Sfakianakis, with borrowers tempted by lower spreads. There have been no sales of dollar-denominated bonds from Saudi Arabia this year, according to data compiled by Bloomberg, compared with $2.5bn of riyal-denominated paper.