What is the secret of the continued decline in the Saudi foreign reserves?

 What is the secret of the continued decline in the Saudi foreign reserves?


It seems that the net foreign assets of the Saudi Arabian Monetary Agency, a standard to measure the Kingdom's ability to support its currency, in the process of recording a sharp decline this year, in light of the decline in oil prices and the direction of Riyadh to expand its sovereign wealth fund investments abroad.

Those assets from a record level dropped reached $ 737 billion in August / August 2014 to 529 billion at the end of 2016, with the direction of the government to liquidate some assets; to cover its huge budget caused by falling oil prices deficit.

This year austerity campaign contributed to a partial rebound in oil prices in Riyadh help achieve progress in reducing the deficit; it fell by 71 percent from what it was a year ago, reaching 26 billion riyals ($ 6.9 billion) in the first quarter.

However, the net foreign assets continued to shrink at the same rate almost backed down $ 36 billion in the first four months of 2017, while representing a mystery to economists and diplomats who follow Saudi Arabia, and perhaps constitute a blow to the confidence of the markets in Riyadh.

Khadija said right, head of regional research at Emirates NBD, the largest banks of Dubai: "This refers to the continued existence of a large deficit in Saudi Arabia's balance of payments is not due to the export of oil revenues dwindling."

Saudi officials did not comment in detail on the reasons for the low reserves, although some pointed out that it may be due to private sector activity rather than government spending.

Some analysts have speculated that the decline was due to spending on Saudi Arabia's military intervention in Yemen.

This is unlikely; the senior Saudi official in late 2015 pointed out that the intervention, which was largely confined to the air campaign is not a major ground war, costing the kingdom about seven billion dollars a year, which is in line with foreign military experts estimate.

Others have speculated that capital flight from Saudi Arabia may be the reason for the decline in reserves. However, the Saudi Arabian Monetary Agency data (SAMA), the kingdom's central bank, commercial banks in foreign exchange transactions do not support this theory, too.

The economist said a Saudi bank "capital flight diminished as an issue. Valtdvqat out in 2016 was very small compared to 2015, which saw large outflows. "

He said an international banker in contact with Saudi authorities that a considerable amount of decline in foreign assets apparently due to the transfer of funds to a state fund to invest abroad, especially the Public Investment Fund, the main sovereign wealth fund.

Riyadh plans to invest large sums of money abroad; in order to obtain technology and raise revenue funds. Public Investment Fund has said it will invest up to $ 45 billion over five years in the technology fund established by the company should the Bank of Japan and $ 20 billion in the fund infrastructure of US plans to Blackstone established.

Remittances will not represent a public investment fund any reduction in the total wealth of the government, but it means a decrease in the liquid assets available to the central bank to defend the riyal if necessary. The fund declined to comment.

* Oil

Likely also -fima Abdo- to impose a new drop in oil prices put pressure on foreign assets; the average Brent price of $ 54.57 a barrel in the first quarter of this year, and then declined since then to around $ 46 a barrel, more than US $ only one on the average prices last year.

Perhaps it means a simple easing coupled with austerity measures in recent weeks; to ward off the specter of recession, the deficit in Riyadh budget for the entire year 2017 will be close to the original estimate of 198 billion riyals (52.79 billion dollars), and perhaps a little higher.

This would represent an improvement over the level of the deficit last year, which stood at 297 billion riyals, but it will yield is transfers to the Public Investment Fund for the monetization of more foreign assets of the Central Bank.

Saeed Sheikh, chief economist at the National Commercial Bank, Saudi Arabia's largest banks "in the future, it is likely that the decline will continue in the light of the projected budget deficit for the year, which may require withdrawal of foreign reserves to finance."

Sheikh said that intensive borrowing in foreign currency allows Riyad financial flexibility, but it does not increase net foreign assets; as the debt obligations are recorded in the box. The Kingdom issued Sukuk worth nine billion dollars abroad during the month of April / April last.

The government said it plans to resume domestic bond issues later this year, after more than half a year hiatus. Last month, a senior official at the Ministry of Finance estimated that the local bond will cover between 25 and 35 percent of the budget deficit in 2017. That would leave a significant amount of coverage of foreign assets.

At the end of April / April, assets stood at $ 493 billion, which is enough to defend the riyal for years; as this amount covers imports four years.

However, the rise in the cost of insurance on the Saudi debt default risk in the current month; to reach its highest level since early February, indicates that anxiety may be on the rise.

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