Dubai: Saudi Arabia's financial markets barely blinked on Thursday after its debt was downgraded — a sign that a charm offensive by Saudi economic officials, and determined action against speculators, have bought it time in the eyes of many investors.
In the last few weeks, officials of the central bank and ministries of finance, economy and oil have met privately with groups of foreign bankers and analysts to discuss the kingdom's plans to cope with low oil prices.
The officials have reiterated their commitment to the Saudi riyal's peg of 3.75 to the US dollar and described efforts to diversify the economy beyond oil, participants at the meetings told Reuters, speaking on condition of anonymity.
In contrast to past practice, the Saudis have been willing to provide lengthy answers to questions on the vulnerability of their economy. They have also stressed that they are prepared to deploy the central bank's huge foreign assets, which totalled $609 billion at the end of 2015, to withstand economic shocks.
"The core message was that the Saudis are much better prepared to handle low oil prices — reserves are high and debt is low," said one participant. "At the same time they are keen to show it's not business as usual and they are making serious reforms to re-energise growth."
The meetings did not eliminate doubts about Riyadh's ability to push through complex and difficult reforms that would boost non-oil revenues, foster new industries and make the government more efficient. Saudi Arabia has been drawing down its foreign assets at an annual rate of over $100 billion, suggesting it has a window of only a few years to get the reforms right.
Nevertheless, the meetings have helped to persuade some investors that a devaluation of the riyal is not on the cards, and that the world's top oil exporter faces no imminent economic crisis, participants said.
Late on Wednesday, Standard & Poor's cited the damage to state finances from cheap oil when it cut Saudi Arabia's long-term sovereign credit rating by two notches to A-minus, with a stable outlook, from A-plus.
"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," S&P said.
But the Saudi riyal firmed against the dollar in the forwards market on Thursday, while prices of Saudi firms' international bonds barely moved and the cost of insuring Saudi sovereign debt against default ticked up only marginally.
The Saudi stock market headed for its fourth straight day of gains, in sharp contrast to S&P's last downgrade of the kingdom in October, when investors sold stocks.
Financial markets are firm partly because the Saudi central bank has acted aggressively to deter speculation against the riyal in the forwards market.
The riyal dropped to record lows in that market in January as banks hedged against the risk that authorities might devalue the currency to inflate the value of their dollar oil revenues and reduce capital outflows.
As it fell, investors in other markets became nervous, creating a cycle of worsening sentiment towards Saudi Arabia.
The central bank responded by warning banks not to speculate and urging them not to conduct derivatives trades that would pressure the riyal. The threat of getting on the wrong side of the central bank and its huge reserves has worked for now; the riyal is stable at higher levels and forwards trade has slowed.
The officials' charm offensive has also helped because a main message in their meetings with bankers and analysts was that they saw no need to change the currency peg.
Saudi authorities explored the idea of changing the peg in a broad review of economic policy, but concluded this would be counter-productive except perhaps in the distant future, when the economy is much more diversified and could cope better with a surge of import prices, the participant said.
In contrast to the S&P downgrade in October, when the finance ministry quickly issued an indignant statement criticising the agency's action, there was no official Saudi response on Thursday.
However, the markets are aware that the other two major credit agencies have much higher ratings for Saudi Arabia. Moody's Investors Service has it at Aa3, three notches above S&P, with a stable outlook; Fitch Ratings has it at AA, four notches above S&P, with a negative outlook.
Inside Saudi Arabia, jitters over the economy have not disappeared. At a store selling watches in the city of Khobar this week, a shopkeeper said he feared a riyal devaluation would ravage his business. A Saudi banker said he thought officials might consider devaluation late this year if oil didn't rebound.
But for some months at least, authorities seem to have convinced markets to give them the benefit of the doubt.
"Despite perennial rumours, I believe the government will not depeg or devalue its currency," said John Sfakianakis, a Riyadh-based economist. "For the sake of stability, predictability and wealth preservation of the middle class, they haven't done so in previous difficult times in the 1990s and late 2000s, and they won't do it now."