Saudi Arabia might be plotting its return to the center of the oil world, but that journey won’t be without some speed bumps.
Fitch Ratings downgraded the country’s credit rating to “AA-” from “AA.” While that’s still well within investment-grade territory, oil prices have wrecked its finances. The country is pulling back on everything from fuel subsidies to construction contracts, but that won’t likely be enough to quickly ease its record deficit.
Making matters worse: Fitch said it expects it oil prices to average $35 per barrel in 2016, then $45 in 2017, from around $44 today for international benchmark Brent crude. The commodity has rallied from earlier this year, when it was in the mid-$20s, on hopes that Saudi Arabia, Russia, and others might broker a freeze in production to ease the global oil glut.
Fitch does think that Saudi Arabia’s banking system is less profitable but still healthy, and the country’s huge reserves remain a buffer against complete disaster. But the agency gave the country’s credit rating a negative outlook. If oil prices stay much lower for longer, or if a host of proposed revenue streams prove insufficient to slow the drag on reserves, things could get uglier quickly.