Economists Puzzled By Unexpected Plunge In Saudi Foreign Reserves

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: