What’s behind Saudi Arabia’s dwindling treasure chest?

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• Government’s central reserves declined 46% in five years
• Low oil prices from 2015-2021, high spending and pandemic behind fall
• Analysts confident reserves redeployed wisely into funds and projects

Saudi Arabian reserves have dwindled by almost half in the last five years, with the government splashing out $70 billion on investment plans amid the coronavirus pandemic.

In spite of the kingdom’s depleted treasure chest, analysts expressed confidence that the reserves are being redeployed wisely into funds and giga-projects, as oil prices and foreign direct investments remain buoyant.

According to the latest figures for May from the Saudi Central Bank (SAMA), the government’s central reserves amounted to 319.347 billion riyals ($85.16 billion).

This compared to 589.185 billion riyals in 2017 – a decline of 45.8 percent in five years. 

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Freddie Neve, Middle East Associate at the Asia House, a London-based independent think tank and advisory service, which works with companies and governments in the region, said there were several factors behind the kingdom’s spending spree.

The PIF and the pandemic

“Since 2015, average global oil prices have been below the approximate $80 per barrel benchmark that Saudi Arabia requires to balance its budget. 

“Simultaneously, government expenditure has risen since Vision 2030’s launch in 2016, with the kingdom announcing its largest ever budget at around $295 billion in 2019,” Neve told AGBI.

“Low oil prices between 2015 and 2021, coupled with high spending prompted a fall in reserves. 

“Declining reserves were compounded by the pandemic which saw a fall in economic activity and increased spending on economic stimulus,” he added.

The pandemic was a major factor in depleting government reserves in 2020 and 2021, according to Gabriele de Leva, country risk analyst for the Middle East and North Africa ratings agency Fitch Solutions.

“Another major driver behind the fall in reserves is the launch of support packages to the financial system and banks (SR50 billion) and SMEs (SR50 billion) during the pandemic. 

“The central bank also covered fees for private sector stores and entities for point-of-sale and e-commerce transactions from mid-March 2020 to the end of September 2020,” he said.

The kingdom has also restructured how it operates its finances, specifically the growth of its sovereign wealth fund, the Public Investment Fund (PIF). 

Founded  in 1971, it has ramped up its investment activity in recent years and now has total estimated assets of $620 billion. 

“The sharp drop in FX reserves is largely due to the government transferring reserves from Saudi Central Bank (formerly known as Saudi Arabia Monetary Authority) to the Public Investment Fund, the country’s sovereign wealth fund,” de Leva said.

“According to official sources, the SCB transferred SR150 billion to the PIF in 2020. 

“The transfer was underpinned by a shift in the mandate of the country’s central bank, which limits its capacity to use its reserves to invest,” de Leva said.

The sovereign wealth fund has invested in a range of high-profile companies, including Uber, Newcastle United, Live Nation, Boeing, Facebook, Nintendo, BP and Walt Disney.

Ravi Bhatia, the primary analyst for Saudi Arabia at S&P Global Ratings, said the transferring of reserves from SAMA to PIF was intended to boost the returns on investments.

“PIF is trying to undertake investments to grow the size of the Saudi economy and the non-oil economy and boost employment for Saudi youth. 

“If their projects and investments are good and they get the returns, then it should deliver. Project and investment selection is at the heart of this strategy,” Bhatia said.

But it is not just funds going out of the country, FDI into Saudi Arabia is also going up. The kingdom recorded a massive surge in FDI last year, up 257 percent to $19.3 billion, the Ministry of Investment said in its National Investment Strategy report in March.

Surplus ahead

Things certainly do appear to be turning a corner. In December, Saudi Arabia announced that it expects to post its first budget surplus for nearly a decade in 2022.

Estimates say that it would have an extra SR90 billion, or 2.5 percent of GDP, left at the end of this year.

“The surpluses will be used to increase government reserves, to meet the coronavirus pandemic needs, strengthen the kingdom’s financial position, and raise its capabilities to face global shocks and crises,” Crown Prince Mohammed bin Salman was quoted as saying by the Saudi Press Agency.

The budget surplus is likely to go even higher, as oil prices fluctuate from around $60 in August 2021 to double that last month. 

Currently, prices are hovering around the $100 price mark, 20 percent above the kingdom’s break even point.

Fitch’s de Leva predicts that Saudi reserves will grow in the coming years.

At the end of 2021, total reserve assets, including gold, reserves at the IMF, foreign currency deposits abroad and investments in foreign securities amounted to $455.4 billion. 

Fitch predicts that this will rise to $468.6 billion at the end of this year and grow to $513.6 billion by 2026.

Saudi Arabia therefore has sufficient reserves to cover roughly 22 and half months of import costs.

Debt and taxes

One of the reasons for this resurgence, de Leva believed, was the Riyadh government’s embracing of the debt markets in recent years.

“Saudi Arabia has been issuing limited international debt over the past decade. 

“This suggests that the authorities have been using mostly their foreign currency reserves held at the central bank to fund the current account deficits in 2015, 2016 and 2020. 

“This trend has now changed, with a higher willingness to issue international debt,” he said.

The National Debt Management Center was established in the fourth quarter of 2015.

According to its official website, as of the end of March this year, the kingdom’s total outstanding direct indebtedness amounted to SR958.6 billion, comprising SR579.4 billion of domestic debt and SR379.3 billion of external debt.

Asia House’s Neve also pointed to other sources of new income, such as VAT.

It increased the sales tax from 5 percent to 15 percent in July 2020. 

This means the government will increasingly be able to tap new income streams, instead of dipping into its SAMA reserves.

“I don’t think they’re in any significant danger right now. 

“They’ve gone through a period of low oil prices and that impacted foreign exchange reserves, and now they’re going to build up again,” S&P Global Ratings’ Bhatia said.