While strong when compared with other sovereign credit ratings, Saudi Arabia's fiscal health remains under threat from low oil prices, Moody's said.

Moody's Investors Service said the drop in crude oil prices, off more than 50 percent since the middle of 2014, has undermined the economy and finances for Saudi Arabia. As a result, the long-term rating for the country was lowered one notch from Aa3 to A1.

According to Moody's, Saudi Arabia's nominal gross domestic product declined around 13 percent last year and should shrink another 5 percent in 2016. Though crude oil prices have recovered strongly so far this year, the ratings agency said it will be another three years before the Saudi economy returns to levels from before 2014, when crude oil prices started moving lower.

Government finances, meanwhile, have eroded substantially. Moody's expects the government to run a deficit of just under 10 percent of its GDP over the next four years. Over the next five years, Moody's said, the Saudi economy will grow at an average rate of 2 percent, compared with the 5 percent growth rate in the four years ending in 2015.

Looking ahead, the ratings agency said the damage from the slump in crude oil prices left a durable mark on Saudi Arabia's economy.

"A combination of lower growth, higher debt levels and smaller domestic and external buffers leave the kingdom less well positioned to weather future shocks," it said.

An economic agenda, dubbed Vision 2030, aims to boost Saudi Arabia's non-oil revenue and relies in part on raising money through the public listing of shares in the Saudi Arabian Oil Co.

"While the government has ambitious and comprehensive plans to address the shock by diversifying its economic and fiscal base, those plans are at an early stage of development and their impact remains uncertain," the rating's agency said in its rationale statement, published from Germany.

Nevertheless, Moody's said the plans to diversify the economy away from oil should stabilize the nation's economy and lead to a recovery in the rating level "over time."