Saudi Arabia's Foreign Reserves Decline as Oil Windfall Remains Untapped.

Introduction:

Saudi Arabia, the world's largest crude exporter, has experienced a significant decline in its foreign reserves, reaching the lowest level in over 13 years. Despite a $326 billion oil windfall last year, the kingdom has yet to utilize these funds to bolster its central bank holdings. This blog post delves into the factors contributing to the decline in reserves, the change in Saudi Arabia's management of oil wealth, the implications for the country's economy, and the future outlook.

A Decrease in Foreign Reserves:

Saudi Arabia's net foreign assets dropped to 1.538 trillion riyals ($410 billion) in April, marking the longest streak of falling reserves since early 2019. The decline, totaling nearly $42 billion since November, represents a reduction of over 44% since the peak in August 2014.

Shifting Management of Oil Wealth:

Historically, higher oil prices and increased production led to a rapid rise in Saudi Arabia's foreign reserves. However, the Saudi government announced a change in its approach last year, intending to retain the windfall and determine its allocation later. With a surplus of 103.9 billion riyals in the budget last year, the government sought to safeguard public finances from potential shocks.

Importance of Reserves:

Saudi Arabia's foreign reserves are crucial for maintaining confidence in the country's 3.75-per dollar peg and its economy overall. The peg ensures stability in the exchange rate, while the reserves act as a buffer against external economic pressures. The riyal's 12-month forward outright rate has remained relatively stable, suggesting traders' confidence in the peg's solidity.

Uncertainty in Allocation:

Although Saudi Arabia achieved its first budget surplus in nearly a decade last year, the allocation of funds remains uncertain. Finance Minister Mohammed Al-Jadaan indicated that a significant portion would likely go to the central bank. However, other potential recipients include the National Development Fund, tasked with infrastructure investment, and the Public Investment Fund, the sovereign wealth fund.

Challenging Fiscal Outlook:

The International Monetary Fund (IMF) presents a less favorable fiscal outlook for Saudi Arabia. It forecasts a budget deficit of 1.1% of gross domestic product (GDP) this year, contrary to the government's expectation of a second consecutive surplus, last estimated at 16 billion riyals. The IMF also raised its estimate of the oil price required to balance Saudi Arabia's budget to over $80 a barrel, exceeding the current level of around $77 for Brent crude.

Conclusion:

Saudi Arabia's foreign reserves have declined to their lowest level in over 13 years, despite a substantial oil windfall from the previous year. The kingdom's decision to retain the funds and delay their allocation has contributed to the diminishing reserves. While the country aims to protect its public finances and maintain a stable exchange rate, the decline raises concerns about the future management of oil wealth and the fiscal outlook. As Saudi Arabia navigates these challenges, it will be essential to strike a balance between economic stability, prudent financial management, and strategic investments for long-term growth.