Economists Puzzled By Unexpected Plunge In Saudi Foreign Reserves

Tyler Durden's picture

The stabilization of oil prices in the $50-60/bbl range was meant to have one particular, material impact on Saudi finances: it was expected to stem the accelerating bleeding of Saudi Arabian reserves. However, according to the latest data from Saudi Arabia’s central bank, aka the Saudi Arabian Monetary Authority, that has not happened and net foreign assets inexplicably tumbled below $500 billion in April for the first time since 2011 even after accounting for the $9 billion raised from the Kingdom's first international sale of Islamic bonds.

As the chart below shows, according to SAMA, Saudi net foreign assets fell by $8.5 billion from the previous month to $493 billion the lowest in six years, bringing the decline this year to $36 billion. Over the past three years, Saudi foreign reserves have dropped by a third from a peak of more than $730 billion in 2014 after the plunge in oil prices, prompting the IMF to warn that the kingdom may run out of financial assets needed to support spending within five years, according to Bloomberg.

Analysts were puzzled by the ongoing sharp decling in Saudi reserves, especially since Saudi authorities recently embarked on a very public and "unprecedented" plan to overhaul the economy and repair public finances.

Quoted by Bloomberg, Mohamed Abu Basha, a Cairo-based economist at EFG-Hermes said that he "didn’t really see any major driver for such a huge drop, especially when accounting for the sukuk sale." He added that even if the proceeds from the sale weren’t included, “the reserve decline remains huge."

Adding to the confusion, the pace of the decline in reserves this year "has puzzled economists who see little evidence of increased government spending, fueling speculation it’s triggered by capital flight and the costs of the kingdom’s war in Yemen." Of course, the recent purchase of $110 billion in US weapons will be an even greater drain on Saudi finances, and begs the question whether the Saudis can even afford it.

Ironically, the reserve decline has continued even after the introduction of sharp austerity measures, designed to reduce the budget deficit, which have weighed on the economy and brought non-oil growth to a halt last year. According to Bloomberg data, loans, advances and overdrafts to the private sector declined 0.6 percent in April compared with the same month a year earlier, central bank data show. Furthermore,  GDP growth in the world’s biggest oil exporter will likely drop to just barely above contraction, and is expected to grow by just 0.6% this year from 1.1% in 2016.

Meanwhile, local authorities disagree with the consensus and say growth will exceed 1%, in part because of a plan to launch a four-year, 200 billion-riyal ($53 billion) stimulus package targeting the private sector. Additionally, Finance Minister Mohammed Al-Jadaan said in April that the government didn’t withdraw from its central bank reserves during the first quarter. He said the decline could be attributed to local contractors paying overseas vendors after the government settled its arrears.

Adding to the variables, last year Saudi Arabia revealed it is carrying out the biggest economic shakeup in the kingdom’s history to reduce its reliance on oil revenue. The measures include reducing subsidies and selling government stakes in several companies, including Saudi Arabian Oil Co., or Aramco, which has been the other main driver behind Saudi insistence on keeping oil prices higher even if it means losing market share to US shale producers, a stark change from its strategy at the end of 2014 when it hoped to put low-cost producers out of business. In an attempt to boost its funds, the kingdom also allowed qualified institutional investors from outside Gulf Arab states to trade Saudi stocks directly from June 2015, and introduced additional changes this year to attract more funds.

Taking the other side of the argument, speaking to Bloomberg, BofA's Hootan Yazhari said that the continued drawdown was something "he had been expecting" even though he expects continue lacklustre growth and predicts that 2017 will be a very difficult year for Saudi banks.

Whatever the reason, one thing is becoming clear: if Saudi Arabia is unable to stem the reserve bleeding with oil in the critical $50-60 zone, any further declines in oil would have dire consequences on Saudi government finances. In fact, according to a presentation by Sushant Gupta of Wood Mackenzie, despite the extension of the OPEC oil production cut, the market will be unable to absorb growth in shale production and returning volumes from OPEC producers after cuts until the second half of 2018. Specifically, the oil consultancy warns that due to seasonal weakness in Q1 for global oil demand, the market will soften just as cuts are set to expire in March 2018.

Additionally, below we present some further critical perspectives from a reader on what the continued decline in Saudi reserves means:

Saudi Arabia is in big turmoil. One third of GCC is now quasi- junk rated (Oman and Bahrain both are now BB rated) which is effectively a junk rating.

 

Oman is already siding with Iran due to business (new ferries, 2 new China Dragon malls, all trade going via Oman instead of Dubai ports, more flights and opening of the first bank in the world from Oman, inside Iran, are just a few signals aside from all Iranian conferences being held in Oman and the first trip of President of Iran to Oman).

 

Now Qatar wants to side with Iran which is having massive repercussions (cancelling of OSN Saudi subscriptions by Qatari’s, blocking Al Jazeera TV in Saudi and UAE, war of words by UAE and Saudi Ministers but most importantly the call between Iran President and Qatari Emir yesterday etc).

 

One third of GCC is now actively siding with Iran. To say there is a crisis in the GCC is an understatement! This is bound to escalate.

 

This is occurring at a time when reserves are plunging at a rapid speed, despite issuing bonds in mega sizes of tens of billions per annum!

 

Saudi has lost one third of it’s reserves in less than 3 years!

 

If Saudi lost 11% of their reserves in 2014, 11% reserves in 2015 and 11% in 2016, can you guess how much reserves will Saudi lose in 2017? Total Saudi reserves are now at USD 493bn which will drop another 11% to USD 438bn or lower maybe closer to USD 400bn by the end of 2017!

 

All remaining assets are typically in hard assets like long term investments, oil and other assets overseas, real estate (towers around the world), all of which are not at all easy to sell. As I have predicted that GCC currency peg should break. My target of 2018 remains.  It may begin with Oman and Bahrain buckling under pressure first. If they depeg or depreciate, then others must follow because all business will only go those 2 countries otherwise due to being “cheaper”.

 

The rationale being the oil plunge in June 2014. First 2 years, GCC could use it’s reserves. Next 2 years until until end of 2017 they can keep borrowing by issuing the bonds. The pressure escalates dramatically when they start getting downgraded due to excessive borrowings (as has happened both to Oman and Bahrain as well as Saudi but they are not yet junk, just Single A rated).

 

Sovereign fund assets in global equities have dropped 18% between 2014 and 2016. Expect decline to rise to 31% and drop from their peak sovereign fund assets in 2014 at USD 3,256 billion and should be down to USD 2,200 billion by end of 2017!

 

VAT is coming in 2018 to GCC along with corporate taxes. Do not be surprised if Oman or Bahrain CANCEL VAT. If they do so, they will get more business that will compensate for lost revenues but will be the end of GCC union as well.

 

Saudi and UAE are already dealing with China actively and Saudi King made a historic visit to China 2 months ago. Most likely a timeline has been set when China will be able to pay Saudi and UAE in Chinese Yuan instead of US dollars (which China pays to Nigeria, Iran, Russia, Venezuela etc already for buying oil from them). 

 

That event will bring USD to it’s knees and also be the end of the US petrodollar system and the end of GCC peg or at least a massive depreciation.

 

Trump has done a massive coup by taking hundreds of billions dollars away from Saudi and possibly also from UAE soon to provide them with “security”. This will cause a further massive dip in their reserves over the next 1 year.

 

So expect monetary, fiscal and real turbulence in the months ahead. And yeah, more taxes or fees or fines too!

Finally, there is the possibility that as sov-wealth funds seek to liquidate to boost liquidity, a repeat of the inverse petrodollar episode observed in 2015 emerges once again:

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Snaffew's picture

only a matterof time---the saudi elite piss through money that would make a drunken sailor blush.  The sooner they go broke the better, then the"princes and sheikhs can be expelled from power.  These are not smart people---just filthy rich in oil which will soon pass through the system like a painful kidney stone.

nope-1004's picture

So they're short of cash, yet "economists" are puzzled after evidence of the wastage traveling like this?

Petrodollar has allowed gross indulgence.  Time for it to stop.

CrabbyR's picture

I always wondered how was on the other side of th cds ets

CrabbyR's picture

try again..I always wondered who was on the other side of these cds bets......perhaps we have a clue

JohninMK's picture

The sooner they revert to being nomad tribes in the desert the better for the rest of us.

Antifaschistische's picture

"puzzled"...seriously?  Only an economist would be puzzled.

Let's see..a collection of people, who don't really want to work, but want to maintain the most extravgant lifestyle on the planet, in one of the harshest god forsaken places on the planet...(other than oil of course...God gave them that :) )

does it take a non-economist to figure of that such a lifestyle is terminal?

GooseShtepping Moron's picture

I don't suppose the $300 billion arms deal that Trump just cut with them had anything to do with it?

zweikaiser's picture

The profession of economists keeps digging lower in dishonesty and incompetence.

 

You utter idiots:

1) Saudi Arabia has been spending enourmougly for the military, yearly. The fact that the budget hasn't changed much doesn't mean that the money shouldn't come from somewhere.

2) Most importantly, Saudi Arabia has a currency pegged to the Dollar. That means that if the economy goes through a downturn (cause oil) then the revenue in Dollars decreases and since they trade mostly in Dollars they have less than before. To sustain the pegging, which economically means the lifestyle of princes and the salaries of foreign personnel (because Saudis have zero professionals of their own) they need Dollars, so if they get less from oil, they need to use their own reserves.

Indeed, reserves are going down. Even if they stored billions those can be depleted fast for the insanity Saudis are doing.

 

Also, Taleb is right. ''Experts'', especially economists are frauds.

bluskyes's picture

If you think a lot of terrorists come from saudi arabia now  - just wait till the welfare stops.

sinbad2's picture

They are paid to be terrorists, take the money away, and they will go away. Every ISIS fighter is paid $1000 a month.

RagaMuffin's picture

Now how are they gonna pay for the $100bln that Obama sold them and now the  300biln(?) DT sold them?  

serotonindumptruck's picture

The Saudi Ghawar field is running dry. While the Saudis continue to pump massive amounts of seawater into their aging, decrepid oil fields in an effort to extract the very last drop of crude, the rest of the world continues to pass them by.

The only thing the House of Saud has left is to make war on their neighbors such as Yemen and their proxies, Iran and Russia, with the guaranteed financial support of the Western world.

Although not attributed to the House of Saud, the following quote applies.

“My grandfather rode a camel, my father rode a camel, I drive a Mercedes, my son drives a Land Rover, his son will drive a Land Rover, but his son will ride a camel.”
Antifaschistische's picture

but...oil is their goose and golden egg.   If they are truly at peak oilfield production...and beyond, how does war really benefit them?

CRM114's picture

You seem to be assuming they are intelligent, reasoning individuals.

Whatever gave you that idea?

sinbad2's picture

They want the oil in Yemen and Syria to replace the Saudi oil.

Wars are armed holdups at a national level, all wars are about money.

earleflorida's picture

yemen has no oil..

syria's oil is in the north in which the kurds want...

Mosul has been pumping oil since the end of the 19th century til present...

CRM114's picture

..but they all still f#ck camels.

Centerist's picture

The author seems to have forgotten that oil-based economies with extensive social welfare systems have to have oil remain at a certain level in order to maintain those programs.  Normally, those countries build reserves when oil prices are higher so that they can survive when prices drop.  With the new dynamic in global oil supplies that fracking has unleashed, prices are likely to remain depressed for much longer than the old model supports.

It would seem that the Saudis will need to recalculate their budget so that is accounts for the new environment.

AC_Doctor's picture

Free Camel Toes for all Sunni women.  These fuckers don't have the cash to buy $350 billion in US weapons in the next ten years.

miki's picture

shieks be eating camel shit soon

EenuschOne's picture

"...the Kingdom's first international sale of Islamic bonds."

Should that not be "bombs" ?

 

 


sudzee's picture

US and Saudi support for ISIS and the ongoing extermination in Yemen is forcing all other Gulf countries into the hands of Iran, Russia and China for protection. Yemen today but maybe UAE tomorrow. At this point its not about oil, its about the the very lives of their own countries. Within a few years the persian gulf will be closed to US military and Saudi will have no customers to sell oil to. With Saudi in ashes the GCC will build pipelines to the EU both gas and oil. 

Ignorance is bliss's picture

umm...do these countries have Gold reserves? What about reserves denominated in Yuan? I just want to make sure they aren't running the ole reserve currency switcharoo without telling Joe six.

earleflorida's picture

Yemen??? East Saudi Arabia`s shia minority stake in 'BIG Fields?"       http://www.telegraph.co.uk/finance/economics/11505273/Saudi-oil-infrastructure-at-risk-as-Mid-East-conflagration-spreads.html      and while were at it....

"Qatar: #1 Exporter of LNG past 15 years avoiding 'Pipeline-Pumping' Dry Gas''

Saudis pay through the nose for Natuarl Gas as do all Persian Gulf Nations... and China wants it all !

https://www.linkedin.com/pulse/qatar-largest-exporter-of-lng-world--mohammad-akbar    (note: last name?)

Ps.    Trump sells to Saudis because Britain, Italy, France, China would fill the void!?  "I DON'T BELIEVE IT!!!"

CRM114's picture

I don't think anyone with the slightest real world experience of Saudi Arabia or its people is the least bit surprised.

 

"We've had enough of 'experts'."

Michael Gove

fliebinite's picture

The play is to get Saudi to spend all their reserves on military weapons.  Then Revolution.  We fly in, stabilize, take their gold.  Works every time.

Scuba Steve's picture

Until ....

His name is Seth Rich

G_T_A_44's picture

Matt Simmons wasn't surprised.

 

Faeriedust's picture

Well.  Survival of the KSA regime: five years or less.  Survival of the U.S. economy: about 2 years longer.  Maybe.

One place the reserves are going is the war in Yemen of course.  But I suspect that lots of them are disappearing into the private accounts of this or that prince -- there are more than a hundred of them, and they can all see the writing on the wall.  They're stashing their assets in safe European banks for when they have to make a quick getaway.  It's not like any of them have any skills or experience by which to work for a living.

Faeriedust's picture

Well.  Survival of the KSA regime: five years or less.  Survival of the U.S. economy: about 2 years longer.  Maybe.

One place the reserves are going is the war in Yemen of course.  But I suspect that lots of them are disappearing into the private accounts of this or that prince -- there are more than a hundred of them, and they can all see the writing on the wall.  They're stashing their assets in safe European banks for when they have to make a quick getaway.  It's not like any of them have any skills or experience by which to work for a living.

TrumanShow's picture

Inexplicable eh? Check the royal family's bank accounts. When they have pissed throught the reserves they can just print, everyone else is doing it. 10 for me, 1 for you..fucking bonanza, why didnt we think of this before?

andrej's picture

War is expensive. It can bankrupt even the richest nations.