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.
GDP growth in the world’s biggest oil exporter will likely drop to barely above contraction, and is expected to grow by just 0.6% this year from 1.1% in 2016. 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....