With Saudi Arabia scrambling to respond to surging US shale production in what many analysts warn is a lose-lose decision, as either Saudi Arabia will lose market share under the current status quo, or government revenue will tumble should the Vienna 2016 production cut deal be canceled, moments ago Fitch poured some fuel on the fire, when it downgraded the Saudi Kingdom from AA- to A+, as a result of the country’s soaring deficit, declining reserves, and a deteriorating balance sheet.

Full report below:

Fitch Downgrades Saudi Arabia to ‘A+’; Outlook Stable

Fitch Ratings-Hong Kong-22 March 2017: Fitch Ratings has downgraded Saudi Arabia’s Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) to ‘A+’ from ‘AA-‘. The Outlooks are Stable. The issue ratings on Saudi Arabia’s senior unsecured foreign-currency bonds have also been downgraded to ‘A+’ from ‘AA-‘. The Country Ceiling has been downgraded to ‘AA’ from ‘AA+’ and the Short-Term Foreign and Local Currency IDRs have been affirmed at ‘F1+’.

KEY RATING DRIVERS

The downgrade of Saudi Arabia’s Long-Term IDRs reflects the continued deterioration of public and external balance sheets, the significantly wider than expected fiscal deficit in 2016 and continued doubts about the extent to which the government’s ambitious reform programme can be implemented.

Government deposits declined by SAR240bn to SAR841bn (35% of 2016 GDP) between June 2016 and January 2017, only about half the peak level of SAR1,643bn in August 2014, although this decline partly reflects transfers between the government and the Public Investment Fund (PIF). General government debt rose to 9.7% of GDP, from 4% in 2015. This included sales of local-currency bonds during the first three quarters of last year and a USD17.5bn Eurobond issued in October. The government balance sheet remains strong relative to ‘A’ and ‘AA’ category peers but will become less of a support for the rating unless the deterioration in public debt dynamics is arrested.