Riyadh runs through financial reserves

Sunday 23/04/2017
Volatility. Workers are seen at the Khurais oil field, 160km from Riyadh. (Reuters)

Washington - Despite impressive ef­forts to curb spending that have included en­ergy subsidy cuts, an in­crease in municipal fees, trimming civil service salaries and postponing or cancelling a host of government projects, Saudi Arabia is continuing to run through its for­eign currency reserves at a concern­ing rate.

This is occurring while Riyadh is hoping that the agreement it helped negotiate between OPEC members and independent oil producers will be extended through the rest of 2017 and bring about much-needed price relief for the kingdom.

Recent figures suggest that, de­spite aggressive austerity measures to staunch the fiscal haemorrhag­ing that Saudi Arabia has been ex­periencing since oil prices collapsed three years ago, the kingdom’s net foreign assets overseen by the Saudi Arabian Monetary Agency (SAMA) have dropped an average of $6.5 bil­lion per month over the past year.

In January, Saudi foreign cur­rency reserves dipped $11.8 billion, followed by a $9.8 billion decline in February. The level of foreign cur­rency assets held by SAMA is esti­mated to be just more than $500 billion, down from a peak of $732 billion in mid-2014, when oil prices were $100 a barrel.

While $500 billion in net foreign assets provides a very healthy cush­ion for Riyadh, that buffer would disappear within a few years at the current rate of depletion. The In­ternational Monetary Fund (IMF) cautioned in 2015 that, if it did not change its fiscal practices, the king­dom was in danger of running out of its entire foreign exchange reserves by 2020. In November, SAMA Gover­nor Ahmed al-Kholifey insisted at a news conference that the Saudi gov­ernment was “very comfortable” with its level of foreign reserves.

That warning from the IMF, how­ever, must have resonated with the Saudi regime, which in April 2016 unveiled Saudi Vision 2030, an am­bitious fiscal overhaul programme masterminded by Saudi Deputy Crown Prince Mohammed bin Sal­man bin Abdulaziz that is intended to transition the economy away from dependency on oil revenues.

The kingdom has been relying heavily on drawdowns from its for­eign reserves to plug giant budget deficits, including a $79 billion fis­cal shortfall in 2016 and a projected $52.8 billion deficit for this year. Through various austerity meas­ures, the kingdom reduced its pro­jected deficit by about $8 billion in 2016.

In announcing the 2017 budget in December, Riyadh said its increase in spending this year to $237 billion was meant to jump-start anaemic economic growth but that the deficit would be significantly smaller than 2016 because of projected higher oil prices and a rise in non-oil income.

The Saudi government raised $17.5 billion from its first interna­tional bond sale in October — the largest bond sale ever from an emerging-market country — but then shelled out approximately $27 billion in November and December in delayed payments to contractors and businesses.

After halting or restructuring hun­dreds of government projects over the past two years as part of cost-cutting measures, the Saudis re­cently hired accounting consultancy group PriceWaterhouseCoopers to conduct a project review of $69 bil­lion worth of government contracts and identify up to $20 billion in sav­ings.

King Salman bin Abdulaziz Al Saud’s government is pulling out all the stops to encourage higher oil prices to materialise in the second half of this year. Riyadh has made it clear that it supports a 6-month ex­tension of a deal between OPEC and independent producers that runs from January until July that has tak­en 1.8 million barrels per day (bpd) of oil off of the global crude markets.

Saudi Arabia has intentionally cut its production even deeper than its agreed quota, formalised in the agreement to make up for errant producers that are proving non-compliant. Official OPEC fig­ures suggest that Saudi oil output averaged 9.88 million bpd for the first quarter of this year, below the 10.058 million bpd Saudi quota per the accord.

Though oil prices have not gained much traction because of sizeable global crude stockpiles, the Inter­national Energy Agency (IEA) had encouraging words for Saudi Ara­bia and its fellow producers in its monthly Oil Market Report, released on April 13, which said the produc­tion deal appeared to be helping re­turn the oil market into balance.

Addressing the idea of extend­ing the agreement, the report’s au­thors stated that “a consequence of (hypothetically) extending their output cuts beyond the 6-month mark would be bigger implied stock draws.”

The IEA struck a cautionary note, however, saying that while the im­proved stock levels “would pro­vide further support to prices,” this “would offer further encouragement to the US shale oil sector and other producers,” referring to producers that are not part of the agreement and that would be inspired to boost output thanks to higher oil prices.