Saudi Drawing Down FX Reserves To Cover Deficit, Data Suggests

Saudi Arabia has begun drawing down its foreign currency reserves for the first time since 2009 to cover a record state budget deficit caused by the plunge in oil prices, data from the Saudi central bank indicated on Thursday.

Tens of billions of dollars of Saudi money may be withdrawn from Western, mainly U.S., banks and financial markets this year as the world’s biggest oil exporter copes with a sharp reduction in its revenues.

The central bank’s net foreign assets fell 1.4 per cent from a year earlier to 2.650 trillion riyals ($707 billion) in February, according to monthly central bank statistics. It was the first year-on-year drop since February 2010, when Saudi Arabia was affected by the global financial crisis.

Central bank officials could not be reached for comment. Analysts believe that while some of the recent fall is due to the strong U.S. dollar, which has eroded the value of non-dollar assets, Saudi Arabia has stopped putting new money into the reserves on a net basis and is instead taking out money.

“At current oil prices of less than $60 per barrel, Saudi Arabia is almost certainly running twin budget and current account deficits,” London-based Capital Economics said in a report.

“But the government has continued to resist pressure from other OPEC members to cut output in order to shore up prices. Instead, the authorities have started to draw down their FX reserves to sustain spending.”

Net foreign assets peaked at a record $737 billion last August. The central bank acts as Saudi Arabia’s sovereign wealth fund; the vast majority of the assets are believed to be in dollars, especially U.S. Treasury bonds.

The February data showed the central bank had $540 billion invested in foreign securities, about $2 billion less than in January, and $108 billion of deposits with banks abroad, down $21 billion. That implies the central bank has been focusing on bank deposit withdrawals rather then selling U.S. Treasuries.

Because of cheap oil, the government has projected a record budget deficit of $38.7 billion for 2015. Officials have insisted they will not cut spending sharply because of the need to keep the economy growing and sustain social welfare payments, which are key to maintaining political stability.

The government could cover the deficit by borrowing or running down some domestic assets — it has the equivalent of about $90 billion deposited at Saudi commercial banks. But Saudi policymakers tend to avoid debt, and they do not want to hurt the economy by tightening banking system liquidity.