Riyadh runs through financial reserves
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.