Saudi foreign reserves rise in June for first time in a year

The Saudi Arabian central bank’s foreign reserves, which the government has been liquidating to cover a budget deficit caused by low oil prices, rose in June for the first time in over a year, official data showed on Thursday.

The central bank’s net foreign assets climbed to $493.3bn last month from $491.7bn in May.

On a year-on-year basis, however, they shrank 12.3 per cent. They had hit a record high of $737bn in August 2014 before starting to fall with oil prices.

Analysts said it was not yet clear whether a three-year downtrend in the reserves was ending. The long slide has worried financial markets because the reserves may be needed to defend the Saudi riyal from any speculative attack.

The central bank did not explain the reason for June’s rebound. But the data showed government deposits at the central bank fell last month, suggesting the reason was probably not an increase in state revenues or improvement in Riyadh’s financial health.

Monica Malik, chief economist at Abu Dhabi Commercial Bank, said the rise in net foreign assets did not necessarily mean their downtrend had ended or that the government would no longer need to draw them down.

She said pressure to liquidate the reserves had eased this year compared with last year because of government austerity measures, and Riyadh’s decision to begin raising money with local currency Islamic bond issues this month could ease the pressure further.

Nevertheless, Riyadh is still running a substantial budget deficit – officially projected at $52.8bn this year – so it is likely to need to tap the reserves again at some point, she said.

“Fluctuations in the speed of the reserve drawdown in recent months don’t seem to have been due to the fundamentals of state spending and revenue. Instead they may have more to do with factors such as the transfer of money to government investment vehicles,” Malik said.

As part of economic reforms, the government has been building up the Public Investment Fund, its main sovereign fund, to help it make big-ticket acquisitions abroad and play a larger role in developing the Saudi economy.

The portion of the Saudi reserves kept in foreign bank deposits fell by $1.7bn from May to $94.6bn in June, but foreign securities holdings climbed $2.1bn to $337.1bn. The vast majority of the reserves are believed to be denominated in U.S. dollars.

The central bank data also pointed to a sluggish Saudi economy. Outstanding bank loans to the private sector shrank from a year earlier for the fourth straight month in June; they fell 1.4 per cent, after a 0.7 per cent drop in May.