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Moody’s Investors Service has today downgraded the Government of Italy’s local and foreign-currency issuer ratings to Baa3 from Baa2. The outlook on the rating has been changed to stable, meaning that any downgrade to junk – the worst case scenario – has been taken off the table for the time being.

Moody’s also downgraded to Baa3 from Baa2 the local and foreign-currency senior unsecured bond ratings. The foreign-currency senior unsecured shelf and MTN ratings were downgraded to (P)Baa3 from (P)Baa2. Italy’s local-currency commercial paper rating and foreign-currency other short-term rating were downgraded to P-3/(P)P-3 from P-2/(P)P-2. The rating outlook is stable.
The key drivers for today’s downgrade of Italy’s ratings to Baa3 are as follows:

1. A material weakening in Italy’s fiscal strength, with the government targeting higher budget deficits for the coming years than Moody’s previously assumed. Italy’s public debt ratio will likely stabilize close to the current 130% of GDP in the coming years, rather than start trending down as previously expected by Moody’s. Moreover, the public debt trend is vulnerable to weaker economic growth prospects, which would see the public debt ratio rise further from its already elevated level.

2. The negative implications for medium-term growth of the stalling of plans for structural economic and fiscal reforms. In Moody’s view, the government’s fiscal and economic policy plans do not comprise a coherent agenda of reforms that will address Italy’s sub-par growth performance on a sustained basis. Following a temporary lift to growth due to the expansionary fiscal policy, the rating agency expects growth to fall back to its trend rate of around 1%. Even in the near term, Moody’s believes that the fiscal stimulus will provide a more limited boost to growth than the government assumes.

…click on the above link to read the rest of the article…

Angry China Slams Moodys For Using “Inappropriate Methodology”

May 25, 2017

Angry China Slams Moodys For Using “Inappropriate Methodology”

The market may have long since moved on from Moody’s downgrade of China to A1 from Aa3 (by now even long-only funds have learned that in a world with $18 trillion in excess liquidity, the opinion of Moodys is even more irrelevant), but for Beijing the vendetta is only just starting, and in response to Tuesday’s downgrade, China’s finance ministry accused the rating agency of applying “inappropriate methodology” in downgrading China’s credit rating, saying the firm had overestimated the difficulties faced by the Chinese economy and underestimated the country’s ability to enhance supply-side reforms.

In other words, Moody’s failed to understand that 300% debt/GDP is perfectly normal and that China has a very explicit exit strategy of how to deal with this unprecedented debt load which in every previous occasion in history has led to sovereign default.

The Ministry of Finance reaction came after Moody’s first, and very, very long overdue, downgrade of China since 1989 citing concerns about risks from China’s relentlessly growing debt load as shown below.

“China’s economy started off well this year, which shows that the reforms are working,” the ministry said in a statement on its website. Actually, it only shows that China had injected a record amount of loans into the economy at the start of the year, and nothing else. And now that the credit impulse is fading, the hangover has arrived.

Moody’s on Wednesday also downgraded the ratings of 26 Chinese government-related non-financial corporate and infrastructure issuers and rated subsidiaries by one notch. It also downgraded the ratings of several domestic banks, including the Agricultural Bank of China Limited’s long-term deposit rating from A1 to A2. It also eventually downgraded Hong Kong and said credit trends in China will continue to have a significant impact on Hong Kong’s credit profile due to close economic, financial and political ties with the mainland.

…click on the above link to read the rest of the article…

Yuan Tumbles As Moody’s Cuts China’s Credit Rating To A1, Warns “Financial Strength Will Worsen”

May 23, 2017

Yuan Tumbles As Moody’s Cuts China’s Credit Rating To A1, Warns “Financial Strength Will Worsen”

Offshore Yuan tumbled as Moody’s cut China’s credit rating to A1 from Aa3, saying that the outlook for the country’s financial strength will worsen, with debt rising and economic growth slowing. This leaves the world’s hoped-for reflation engine rated below Estonia, Qatar, and South Korea and on par with Slovakia and Japan.

“While ongoing progress on reforms is likely to transform the economy and financial system over time, it is not likely to prevent a further material rise in economy-wide debt, and the consequent increase in contingent liabilities for the government,” the ratings company said in a statement Wednesday.

And the most obvious reaction was Yuan selling…

Full Statement: Moody’s Investors Service has today downgraded China’s long-term local currency and foreign currency issuer ratings to A1 from Aa3 and changed the outlook to stable from negative.

The downgrade reflects Moody’s expectation that China’s financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows. While ongoing progress on reforms is likely to transform the economy and financial system over time, it is not likely to prevent a further material rise in economy-wide debt, and the consequent increase in contingent liabilities for the government.

The stable outlook reflects our assessment that, at the A1 rating level, risks are balanced. The erosion in China’s credit profile will be gradual and, we expect, eventually contained as reforms deepen. The strengths of its credit profile will allow the sovereign to remain resilient to negative shocks, with GDP growth likely to stay strong compared to other sovereigns, still considerable scope for policy to adapt to support the economy, and a largely closed capital account.

…click on the above link to read the rest of the article…

With Over $13 Trillion In Negative-Yielding Debt, This Is The Pain A 1% Spike In Rates Would Inflict

July 10, 2016

With Over $13 Trillion In Negative-Yielding Debt, This Is The Pain A 1% Spike In Rates Would Inflict

Friday’s unprecedented surge to all time highs in both stock and treasury prices, has got analysts everywhere scratching their heads: which is causing which, and what happens if there is a violent snapback in yields like for example the infamous bund tantrum of May 2015.

But first, the question is what exactly will pause what the WSJ calls the “Black Hole of Negative Rates” which is dragging down yields everywhere. Here is how the WSJ puts it:

The free fall in yields on developed-world government debt is dragging down rates on global bonds broadly, from sovereign debt in Taiwan and Lithuania to corporate bonds in the U.S., as investors fan out further in search of income. Yields in the U.S., Europe and Japan have been plummeting as investors pile into government debt in the face of tepid growth, low inflation and high uncertainty, and as central banks cut rates into negative territory in many countries. Even Friday, despite a strong U.S. jobs report that helped send the S&P 500 to a near-record high, yields on the 10-year Treasury note ultimately declined to a record close of 1.366% as investors took advantage of a brief rise in yields on the report’s headlines to buy more bonds.

As yields keep falling in these haven markets, investors are looking for income elsewhere, creating a black hole that is sucking down rates in ever longer maturities, emerging markets and riskier corporate debt.

“What we are seeing is a mechanical yield grab taking place in global bonds,” said Jack Kelly, an investment director at Standard Life Investments. ” The pace of that yield grab accelerates as more bond markets move into negative yields and investors search for a smaller pool of substitutes.”

…click on the above link to read the rest of the article…

Puerto Rico Says Will Default Tomorrow, Begs Congress For Help “Or Else Crisis Will Get Worse”

May 2, 2016

Puerto Rico Says Will Default Tomorrow, Begs Congress For Help “Or Else Crisis Will Get Worse”

Update: PR Governor Padilla has spoken…

*PUERTO RICO GOVERNOR SAYS WON’T PAY DEBT TOMORROW
*PUERTO RICO GOVERNOR SAYS ISLAND WON’T PAY DEBT MONDAY
*PUERTO RICO GOVERNOR: GOVERNMENT SIGNED MORATORIUM BILL YESTERD
*PUERTO RICO NEEDS DEAL W/ CREDITORS AND/OR CONGRESS: GARCIA

And of course, demands a bailout…

*PUERTO RICO GOVERNOR CALLS ON U.S. CONGRESS, PAUL RYAN FOR HELP

And then threatens…

*CRISIS WILL GET WORSE IF U.S. CONGRESS DOESN’T HELP: GARCIA
*PUERTO RICO GOVERNOR CONCLUDES REMARKS TO COMMONWEALTH

As we detailed earlier, It’s D-Day in Puerto Rico.As Bloomberg reports, investors are finding little comfort in the Puerto Rico Government Development Bank’s efforts to strike a last-ditch agreement with creditors to soften the blow of a default this weekend. The bonds that mature today (May 1st) have crashed to just 20c (disastrously below the 36-cent recovery rate the commonwealth proposed in March).

It appears investors are not buying what Puerto Rico is selling and prefer to dump the bonds than hold out in hope of a ‘deal’…

A default on the $422 million due today is “virtually certain,” S&P Global Ratings said April 11.

No matter which route Puerto Rico takes, credit-rating companies see a default as inevitable. Moody’s Investors Service analysts said last week that any non-payment, even if it’s agreed to by creditors, constitutes a default in their eyes. S&P Global Ratings said a distressed-debt exchange or temporarily withholding interest is synonymous to default.

But as Bloomberg reports, Puerto Rico said its Government Development Bank, which is operating in a state of emergency to preserve its dwindling cash, reached an agreement with some credit unions to delay $33 million of bond payments as the commonwealth rushes toward a potential historic default.

…click on the above link to read the rest of the article…

Does This “Panic Index” Show A Major Crisis Coming In Oil And Gas?

March 3, 2016

Does This “Panic Index” Show A Major Crisis Coming In Oil And Gas?

Little-reported but extremely critical data point for the oil and gas industry emerged yesterday. With insiders in the debt business saying that risk levels in the sector have risen to unprecedented levels.

That came from major ratings service Moody’s. With the firm saying that one of its proprietary indexes of credit problems in the oil and gas sector has hit the highest mark ever seen.

That’s the so-called “Oil and Gas Liquidity Stress Index”. A measure of the number of energy companies that are facing looming credit problems because of overextended debt.

Moody’s said that its Stress Index rose to 27.2 percent as of this week. Marking the highest level ever seen in this key indicator.

In fact, that level is now considerably worse than seen during the last recession. When the Stress Index topped out at 24.5 percent.

Moody’s said that the big jump in the index comes after a significant number of downgrades to energy company credit during February. With the firm having its biggest month ever for lowered credit scores — with a total of 25 firms seeing downgrades to their debt.

Those downgrades are largely affecting the exploration and production space. With 17 of the affected firms coming from the E&P sector. But Moody’s also said that oilfield services firms have been hit with lowered credit ratings.

Critically, the firm said that 10 E&P companies saw ratings on their corporate liquidity cut to the lowest level possible during February. Suggesting that these companies are facing serious issues when it comes to maintaining operating capital.

And Moody’s didn’t mince words when it came to forecasts for the rest of 2016. With Senior Vice President John Puchalla saying, “The composite LSI has been increasing since November 2014 and has moved above its long-term average. This progression signals that the default rate will continue to rise as the year progresses.”

…click on the above link to read the rest of the article…

Chesapeake’s AIG Moment: Energy Giant Faces $1 Billion In Collateral Calls

February 26, 2016

Chesapeake’s AIG Moment: Energy Giant Faces $1 Billion In Collateral Calls

Back on February 10, when looking at Carl Icahn’s darling Chesapeake, whose stock had plunged to effectively record lows on imminent bankruptcy concerns, we said that for anyone brave enough to take the plunge, the “Trade of the Year” would be to go long a specific bond, the $500 million in 3.25s of March 2016 which were maturing in just over a month, and which on February 10 were yielding 300% at a price of 80.5 cents on the dollar.

And then, just two days later, in an unexpected turn, Chesapeake announced that contrary to public opinion, the troubled energy giant “is planning to pay $500 million of debt maturing in March, using a combination of cash on hand and other liquidity that may include its credit line, according to a person with knowledge of the matter.” The issue referenced was precisely the bond that was our “trade of the year.”

To be sure, the bond promptly surged, even as the stock priced tumbled, on what was seen as a very bondholder-friendly action (and thus to the detriment of shareholders) and hit a price of 95 cents while the stock tumbled by 15%, generating a 30% return for anyone who had decided to go along. At that moment we urged anyone in the trade to take their profits and go home, taking a few weeks, or the rest of 2016, off.

A quick update since then shows that those same bonds are currently trading effectively at par (99.25 cents)…

… suggesting that the risk of a near-term Chesapeake bankruptcy may be gone for now.

But is it truly off the table?

Sadly, we think that despite the brief hiccup in optimism, CHK’s troubles are about to get worse, even if this particular bond is ultimately repaid, for one simple reason: in its 10-K filed yesterday, Chesapeake announced that it has just reached its own “AIG moment.”

…click on the above link to read the rest of the article…

Brazil Cut To Junk By All Three Ratings Agencies After Moody’s Joins The Fray

February 24, 2016

Brazil Cut To Junk By All Three Ratings Agencies After Moody’s Joins The Fray

Back in December we warned that Brazil faced a “disastrous downgrade debacle” that would eventually see the beleaguered South American nation cut to junk by all three major ratings agencies.

S&P had already thrown the country into the junk bin and just six days after our warning, Fitch followed suit.

Between the country’s seemingly intractable political crisis and worsening public finances, the outlook is exceptionally dire and just moments ago, Moody’s cut Brazil to junk as well.

MOODY’S DOWNGRADES BRAZIL’S ISSUER, BOND RATINGS TO Ba2 W/ A
BRAZIL’S ISSUER & BOND RATINGS CUT TO Ba2 BY MOODY’S
DETERIORATING DEBT METRICS WILL RESULT IN A MATERIALLY WEAKER CREDIT PROFILE IN THE COMING YEARS

Watch the BRL and the Bovespa. Things likely won’t be pretty.

Below, find the rationale.

* * *

From Moody’s

Moody’s downgrades Brazil’s issuer and bond ratings to Ba2 with a negative outlook

The downgrade was driven by

The prospect of further deterioration in Brazil’s debt metrics in a low growth environment, with the government’s debt likely to exceed 80% of GDP within three years; and
The challenging political dynamics, which will continue to complicate the authorities’ fiscal consolidation efforts and delay structural reforms.

The negative outlook reflects the view that risks are skewed toward an even slower consolidation and recovery, or further shocks emerging, which creates uncertainty over the magnitude of deterioration of Brazil’s debt profile over the rating horizon.

RATIONALE FOR THE DOWNGRADE

Brazil’s credit metrics have deteriorated materially since the Baa3 rating with a stable outlook was assigned in August 2015. That deterioration is expected to continue over the coming three years, given the scale of the shock to the Brazilian economy, the lack of progress made by the government in achieving its fiscal and economic reform objectives and the political dynamics expected to persist over that period.

…click on the above link to read the rest of the article…

These Are The Two Canadian Banks Most Exposed To A Severe Oil Shock According To Moody’s

February 22, 2016

These Are The Two Canadian Banks Most Exposed To A Severe Oil Shock According To Moody’s

Two weeks ago we asked if, in the aftermath of the dramatic selloff suffered by European banks over commodity exposure concerns, whether Canadian banks would not be next in line. The reason was that according to an RBC report, while US banks had already taken significant reserves against future oil and gas loans, roughly amounting to 7% of their exposure, Canadian banks were stuck in denial.

As RBC grudgingly noted, “The small negative moves in credit would normally not even “register” were it not for plenty of evidence of issues surround the oil and gas sector and the impact it could have on the oil producing provinces in Canada.” Yes, well, China already advised its media to stick to “positive reporting” – sadly for the energy-rich or rather energy-por province of Alberta it is now too late.

As for ths reason for this surprising reserve complacency, RBC said the following:

Canadian banks like to wait for impairment events to book PCLs rather than build reserves (called sectoral reserves in the past) for problematic industries.

In other words, let’s just wait with the reserves until the losses are already on the book: hardly the most prudent approach which may be why today, with its usual several week delay, Moodys opined on which Canadian banks it views as most susceptible to a “severe oil slump.”

As quoted by to Bloomberg, Moody’s said that “Canadian Imperial Bank of Commerce and Bank of Nova Scotia would be nation’s hardest hit lenders if the oil slump became sharply worse, while Toronto-Dominion Bank would best be able weather a worsening rout.”

“The prolonged slump in oil prices will increase the financial stress on oil producers and the drillers and service companies that support them, as well as on consumers in oil-producing provinces,” Moody’s said.

…click on the above link to read the rest of the article…

S&P Downgrades Saudi Arabia For Second Time In 4 Months, Also Cuts Oman, Bahrain

February 17, 2016

S&P Downgrades Saudi Arabia For Second Time In 4 Months, Also Cuts Oman, Bahrain

For the second time in four months, S&P has downgraded Saudi Arabia.

In late October, the ratings agency flagged sharply lower oil prices and the attendant fiscal deficit (16% in 2015) on the way to cutting the kingdom to A+ outlook negative.

At the time, S&P projected the deficit would amount to 10% of GDP in 2016. That turned out to be optimistic as the shortfall is now projected to be around 13% and that’s assuming crude doesn’t fall below $30 and stay there.

Riyadh has cut subsidies in an effort to shore up the books, but between the war in Yemen and defending the riyal peg, there’s no stopping the red ink, especially not while the kingdom remains determined to wage a war of attrition with the US shale complex.

Moments ago, S&P downgraded Saudi Arabia again, to A-.

On the bright side, the outlook is now “stable” (chuckle).

* * *

From S&P

Oil prices have fallen further since our last review of Saudi Arabia in October 2015, and we have cut our oil price assumptions for 2016-2019 by about $20 per barrel. In our view, the decline in oil prices will have a marked and lasting impact on Saudi Arabia’s fiscal and economic indicators given its high dependence on oil.

We now expect that Saudi Arabia’s growth in real per capita GDP will fall below that of peers and project that the annual average increase in the government’s debt burden could exceed 7% of GDP in 2016-2019.

We are therefore lowering our foreign- and local-currency sovereign creditratings on Saudi Arabia to ‘A-/A-2’ from ‘A+/A-1’.

The stable outlook reflects our expectation that the Saudi Arabian authorities will take steps to prevent any further deterioration in the government’s fiscal position beyond our current expectations.

…click on the above link to read the rest of the article…

After The European Bank Bloodbath, Is Canada Next?

February 8, 2016

After The European Bank Bloodbath, Is Canada Next?

Back in the summer of 2011, when we reported that Canadian banks appear dangerously undercapitalized on a tangible common equity basis…

… the highest Canadian media instance, the Globe and Mail decided to take us to task. To wit:

Were the folks at Zerohedge.com looking at the best numbers when they argued that Canadian banks were just as levered as troubled European banks?

In a simple analysis that generated a great deal of commentary, a blogger at Zerohedge.com, an oddball but widely followed financial site, suggested that Canadian banks were as leveraged as European banks because they have low ratios of tangible common equity to total assets.

But there’s an argument that looking at that ratio is the wrong way to judge a bank’s strength because it ignores the composition of the assets.

Sadly, the folks at Zerohedge.com were looking at the best numbers, and even more sadly, in the interim nearly 5 years, Canada’s banks took absolutely no action to bolster their capital ratios; in fact, these have only deteriorated.

The Globe and Mail, however, was right about one thing: the TC ratio did not capture the full risk embedded in Canadian bank balance sheets: it was merely a shorthand as to how much capital said banks have in case of a rainy day.

Sadly for Canada, it’s not only raining, it’s pouring for the country’s energy industry, a downpour which is about to migrate into its banking sector. Which is why it is indeed time to take a somewhat deeper dive into the Canadian banks’ balance sheets, where we find something very troubling, and something which prompts us to wonder if the time of freaking out about European banks is about to be replaced with comparable panic about Canadian banks.

The following chart from an analysis by RBC shows that when compared to US banks’ (artificially low) reserves for oil and gas exposure, Canadian banks are…not.

…click on the above link to read the rest of the article…

S&P Just Downgraded 10 Of The Biggest US Energy Companies

February 2, 2016

S&P Just Downgraded 10 Of The Biggest US Energy Companies

Just 10 days after “Moody’s Put Over Half A Trillion Dollars In Energy Debt On Downgrade Review“, moments ago S&P decided it wanted to be first out of the gate with a wholesale downgarde of the US energy companies, and announced that it was taking rating actions on 20 investment-grade companies, including 10 downgrades.

The full release is below:

Standard & Poor’s Ratings Services said today that it has taken rating actions on 20 investment-grade U.S. oil and gas exploration and production (E&P) companies after completing a review. The review followed the recent revision of our hydrocarbon price assumptions (see “S&P Lowers its Hydrocarbon Price Assumptions On Market Oversupply; Recovery Price Deck Assumptions Also Lowered,” published Jan. 12, 2016).

While oil prices deteriorated over the past 15 months, the U.S.-based investment-grade companies we rate had been largely immune to downgrades. However, given the magnitude of the recent reductions in our price deck, most of the investment-grade companies were affected during this review. We expect that many of these companies will continue to lower capital spending and focus on efficiencies and drilling core properties. However, these actions, for the most part, are insufficient to stem the meaningful deterioration expected in
credit measures over the next few years.

A list of rating actions on the affected companies follows.

DOWNGRADES

Chevron Corp. Corporate Credit Rating Lowered To AA-/Stable/A-1+ From AA/Negative/A-1+

The downgrade reflects our expectation that in the context of lower oil and gas prices and refining margins, the company’s credit measures will be below our expectations for the ‘AA’ rating over the next two years. We anticipate Chevron will significantly outspend internally generated cash flow to fund major project capital spending and dividends this year and generate little cash available for debt reduction over the following two years.

…click on the above link to read the rest of the article…

Mexico Faces Its Biggest Corporate Default In Two Decades As Construction Giant Misses Bond Payment

December 3, 2015

Mexico Faces Its Biggest Corporate Default In Two Decades As Construction Giant Misses Bond Payment

Back in August, we said that “Something Is Very Wrong At Mexico’s Largest Construction Company…“

“Let’s say, for argument’s sake, that you’re a big company in an emerging market and suddenly, a commodities crash for the ages and a “surprise” devaluation by the world’s engine for global growth and trade sends your country’s currency into a veritable tailspin,” we wrote. “If that were the case, just about the worst possible situation you could find yourself in would go something like this (adapted from Bloomberg): “Eighty-five percent of [your] backlog is denominated in the [home currency], which plunged to a record low this week [and] almost half of [your] debt is in foreign currencies, mostly dollars.”

That was the situation facing Empresas ICA SAB which had just spooked bond investors by selling a key 3% stake in an airport operator for $56 million in order to pay down debt.

Well, after turning in its worst quarter in nearly a decade and a half in October, Empresas ICA SAB missed an interest payment this week in what Bloomberg says is “just a prelude to what’s likely to be the biggest default in Mexico in at least two decades.” Some $31 million in debt service payments came due on Monday and the company elected to utilize a 30-day grace period to try and make the payment.

“Under the terms of the indenture governing the 2024 Notes, the use of the 30-day grace period does not result in an event of default,” the company said, cheerfully.

Carlos Legaspy, a money manager who holds ICA bonds due in 2017, 2021 and 2024, wasn’t as optimistic: “Do I think they’re going to pay within 30 days? No. The 30 days are not going to make any difference.” Here’s a look at the 2024s:

…click on the above link to read the rest of the article…

“On The Cusp Of A Staggering Default Wave”: Energy Intelligence Issues Apocalyptic Warning For The Energy Sector

November 28, 2015

“On The Cusp Of A Staggering Default Wave”: Energy Intelligence Issues Apocalyptic Warning For The Energy Sector

The Energy Intelligence news and analysis creator and aggregator is not one to haphazradly throw around hyperbolic claims and forecasts. So when it gets downright apocalyptic, as it did this week in a report titled “Is Debt Bomb About to Blow Up US Shale?”, people listen… and if they are still long energy junk bonds, they panic.

The summary:

“The US E&P sector could be on the cusp of massive defaults and bankruptcies so staggering they pose a serious threat to the US economy. Without higher oil and gas prices — which few experts foresee in the near future — an over-leveraged, under-hedged US E&P industry faces a truly grim 2016. How bad could things get?”

The full report by Paul Merolli, a senior editor and correspondent at Energy Intelligence:

Debt Bomb Ticking for US Shale

The US E&P sector could be on the cusp of massive defaults and bankruptcies so staggering they pose a serious threat to the US economy. Without higher oil and gas prices — which few experts foresee in the near future — an over-leveraged, under-hedged US E&P industry faces a truly grim 2016. How bad could things get and when? It increasingly looks like a number of the weakest companies will run out of financial stamina in the first half of next year, and with every dollar of income going to service debt at many heavily leveraged independents, there are waves of others that also face serious trouble if the lower-for-longer oil price scenario extends further.

“I could see a wave of defaults and bankruptcies on the scale of the telecoms, which triggered the 2001 recession,” Timothy Smith, president of consultancy Petro Lucrum, told a Platts energy conference in Houston last week.

…click on the above link to read the rest of the article…

It’s Just Not Saudi Arabia’s Year: First Oil Prices, Now This…

November 4, 2015

It’s Just Not Saudi Arabia’s Year: First Oil Prices, Now This…

Last week, in the latest sign of Saudi Arabia’s deteriorating financial condition, S&P downgraded the kingdom to AA- negative citing “lower for longer” crude and the attendant ballooning fiscal deficit.

To be sure, we’ve covered the story extensively and it was almost exactly one year ago that we flagged the quiet death of the petrodollar and explained the significance to a market that hadn’t yet woken up to just what it means when, thanks to plunging crude prices, producing nations cease to be net exporters of capital.

With more than $650 billion in SAMA reserves, Riyadh does have a sizeable cushion. However, there are a number of factors (in addition to low oil prices) that are weighing heavily including, i) financing the war in Yemen, ii) maintaining the lifestyle of everyday Saudis, and iii) preserving the riyal peg. Here’s a look at the breakdown of government expenditures:

When you mix heavy outlays with declining revenue, it means dipping into the warchest…

Here’s a bit of color from Deutsche Bank which helps to explain what we mean by “the cost of preserving the societal status quo”:

The largest energy subsidy beneficiary is the end-consumer in the form of fuel (petrol) subsidies. Bringing up the price of petrol to levels in the UAE, which earlier this year eliminated the petrol subsidy, could provide the government with USD27bn incremental revenues, or 20% of the budget deficit. However, this is a highly unlikely scenario given the demographic differential between KSA and UAE and the socio-economic impact that such an outcome (blended prices rising from USD0.11/l to USD0.5/l) could have within the country.

The Saudi government could look to increase electricity tariffs. This would be a challenge for residential consumption (51% of aggregate consumption) given the political/social impact, though it would present the highest incremental revenue benefit.

…click on the above link to read the rest of the article…

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