Saudi Arabia’s foreign reserves dropped by over $16 billion last month, as the kingdom sets aside less for the central bank and funnels a greater share of its oil wealth into riskier holdings.
(Bloomberg) — Saudi Arabia’s foreign reserves dropped by over $16 billion last month, as the kingdom sets aside less for the central bank and funnels a greater share of its oil wealth into riskier holdings.
Net foreign assets fell to 1.53 trillion riyals ($407 billion) after increases in May and June, according to the central bank’s monthly report on Monday. It’s the sharpest drop since the depths of the pandemic, when oil revenues sank and the kingdom dipped into its hoard to fund bets on a rebound of US stocks.
The country has been shifting its investment strategy over the past few years away from keeping most of its foreign assets with the central bank as it builds up hundreds of billions of dollars in sovereign funds including the Public Investment Fund and the National Development Fund.
The drawdown “is part of a broader structural shift in how sovereign assets are managed in the kingdom, with more assets held with the PIF,” said Carla Slim, an economist with Standard Chartered Plc. The drop in assets materialized “entirely through FX deposits abroad, with the other components of reserve assets remaining broadly stable.”
Reserves are now at the lowest since late 2009 as the kingdom slashes oil production in a bid to prop up prices.
Although the kingdom collected massive profits last year as oil prices averaged near $100 a barrel, little of the windfall has reached the central bank’s holdings. Its deposits abroad dropped by about $15 billion in July to just over $94 billion, accounting for the bulk of the overall decrease.
The Saudi Finance Ministry has said it would use at least part of last year’s surplus to rebuild reserves held at the central bank, but they are now about $30 billion lower than at the start of the year.
“The net foreign asset position should improve in September, especially when the first performance-linked dividend distribution” arrives from Aramco, said Monica Malik, chief economist at Abu Dhabi Commercial Bank PJSC.
The decline in July was the biggest since the government transferred $40 billion to its wealth fund from the central bank to invest abroad as the global pandemic wreaked havoc across global markets. The stockpile is now down nearly 45% down since peaking in August 2014.
The kingdom’s effort this year to support crude prices with output curbs has left it with far smaller receipts from oil sales abroad. After last year’s oil bounty, Saudi Arabia is at risk of running a budget deficit again following its first surplus in almost a decade.
Earlier this year, the world’s largest crude exporter said it would curb oil supply and pump about 9 million barrels a day. The output cut has since been prolonged until the end of September, raising the risk of an economic contraction this year.
Officials said last year that the kingdom planned to hold on to excess oil revenues and won’t spend the money until rebuilding reserves depleted during years of subdued oil prices.
Read: Saudi Pile of US Treasuries at Six-Year Low in Shift to Risk
Reserves are key to maintaining confidence in the kingdom’s dollar peg. The riyal’s 12-month forward outright rate was little changed on Monday, remaining slightly weaker than the 3.75 peg but suggesting traders see the currency link as solid.
“We do not see a challenge to the peg — just perhaps some governance-related questions on where the assets are and how they are deployed,” said Mohieddine Kronfol, the Dubai-based chief investment officer for Middle Eastern and North African fixed income at Franklin Templeton. “They are still running current-account surpluses and accumulating dollar assets.”
–With assistance from Netty Ismail.
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