Saudi Reserves Fall at Fastest Pace in Decades
RIYADH/DUBAI (Kayhan Intl.) -- Saudi Arabia’s central bank foreign reserves fell in March at their fastest rate in at least 20 years and to their lowest since 2011, showing the severity of the damage inflicted by the slump in oil prices.
The world’s largest oil exporter is suffering from historic price lows, while at the same time measures to fight the new coronavirus are likely to curb the pace and scale of economic reforms launched by Crown Price Muhammad bin Salman.
The Saudi Arabian Monetary Authority said late on Tuesday its net foreign assets, which include securities such as U.S Treasuries and foreign deposits, fell in March to $464 billion, their lowest in 19 years.
The nearly $27 billion decline - the biggest monthly drop in at least two decades - signals the kingdom’s urgent need to tap into reserves to offset economic damage from oil prices and a severe coronavirus-driven slowdown of non-oil sectors.
Finance Minister Muhammad al-Jadaan said last week the kingdom would limit its drawdown to a maximum of $32 billion from reserves this year to fill a widening deficit which it plans to cover instead by increasing borrowing to nearly $60 billion.
Oil revenues in the first three months of the year posted a 24% annual decline to $34 billion and pushed total revenues down 22% year on year.
Saudi Arabia, which had registered more than 20,000 coronavirus cases as of Tuesday with 152 deaths, had originally projected a $50 billion deficit this year, or 6.4% of gross domestic
product (GDP), widening from around $35 billion last year.
Jadaan has said the deficit could now widen to up to 9% of GDP this year, but some analysts have predicted 22% with oil prices at $30 a barrel.
"It’s a very critical situation for Saudi Arabia,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank.
Nearly two months ago, before the global spread of the coronavirus, Riyadh made a bold gambit to slash oil prices.
The Saudis knew it was going to hit their bottom line – their break-even oil price to balance the budget – but they did not foresee such a dramatic slump in demand as the global economy ground to a halt.
Economists described the impact on Middle Eastern economies as a "dual shock”.
"When it became clear how bad the pandemic was, they (the Saudis) expected it to go from bad to worse, but it went from worse to terrible as they didn’t see last week’s move,” Mike Lynch, from U.S. consultancy Seer Energy, told Middle East Eye.
"It is a new kind of shock, that is unprecedented,” Kate Dourian, regional manager for Middle East and Persian Gulf States at the World Energy Council, told MEE.
Some Persian Gulf countries are better placed than others, but it’s hard to say how anyone can get over this, he said. "Look at Saudi Arabia, the war in Yemen, and the business they will lose. It’s a mess.”
In Kuwait, 78 percent of nationals work for the state, and in Saudi Arabia 57 percent, according to the Persian Gulf States Institute.
"You’re already seeing the Saudis cutting their expenses, raising debt, and reining in spending at possibly the worse time, as fiscal stimulus is needed to support their people,” said Dourian.
Persian Gulf economies had been floundering before the corovavirus crisis, with the International Monetary Fund (IMF) warning in a February report that the region’s net wealth could turn negative in less than 14 years.
"The IMF report said that at $20 a barrel, by 2027 the Persian Gulf would become poor, so just seven years from now!” Laury Haytayan, an oil and gas expert at the Natural Resource Governance Institute, told MEE. "Even if oil prices go up to $30, it’s alarming for the region.”
With the length of the coronavirus lockdowns unknown, and economists amending their forecasts on almost a weekly basis, the Persian Gulf states are going to have to borrow money to stay afloat.
Saudi Arabia announced it may borrow $58 billion this year from the international markets, its biggest debt program since 2016. Qatar has raised $10 billion and Abu Dhabi $7 billion.
As Persian Gulf states tighten their belts, military expenditure has also been impacted, with the war in Yemen having cost Saudi Arabia some $5 billion a month.
"To what extent does this explain Saudi Arabia wanting a ceasefire, with the war costing billions of dollars a month? They are trying to reallocate resources that are now more urgent,” said Kristian Ulrichsen, a Baker Institute fellow for the Middle East at Rice University in the U.S.
The triple economic shock to the region may force Persian Gulf rulers to step up to the plate. "The region is at a dangerous crossroads,” said Haytayan.
"There is either a doomsday scenario, with the region plunged again into violence and crackdowns on dissidents, or governments act as real, accountable governments that save their countries, and don’t act like fathers taking care of their kids.”
The world’s largest oil exporter is suffering from historic price lows, while at the same time measures to fight the new coronavirus are likely to curb the pace and scale of economic reforms launched by Crown Price Muhammad bin Salman.
The Saudi Arabian Monetary Authority said late on Tuesday its net foreign assets, which include securities such as U.S Treasuries and foreign deposits, fell in March to $464 billion, their lowest in 19 years.
The nearly $27 billion decline - the biggest monthly drop in at least two decades - signals the kingdom’s urgent need to tap into reserves to offset economic damage from oil prices and a severe coronavirus-driven slowdown of non-oil sectors.
Finance Minister Muhammad al-Jadaan said last week the kingdom would limit its drawdown to a maximum of $32 billion from reserves this year to fill a widening deficit which it plans to cover instead by increasing borrowing to nearly $60 billion.
Oil revenues in the first three months of the year posted a 24% annual decline to $34 billion and pushed total revenues down 22% year on year.
Saudi Arabia, which had registered more than 20,000 coronavirus cases as of Tuesday with 152 deaths, had originally projected a $50 billion deficit this year, or 6.4% of gross domestic
product (GDP), widening from around $35 billion last year.
Jadaan has said the deficit could now widen to up to 9% of GDP this year, but some analysts have predicted 22% with oil prices at $30 a barrel.
"It’s a very critical situation for Saudi Arabia,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank.
Nearly two months ago, before the global spread of the coronavirus, Riyadh made a bold gambit to slash oil prices.
The Saudis knew it was going to hit their bottom line – their break-even oil price to balance the budget – but they did not foresee such a dramatic slump in demand as the global economy ground to a halt.
Economists described the impact on Middle Eastern economies as a "dual shock”.
"When it became clear how bad the pandemic was, they (the Saudis) expected it to go from bad to worse, but it went from worse to terrible as they didn’t see last week’s move,” Mike Lynch, from U.S. consultancy Seer Energy, told Middle East Eye.
"It is a new kind of shock, that is unprecedented,” Kate Dourian, regional manager for Middle East and Persian Gulf States at the World Energy Council, told MEE.
Some Persian Gulf countries are better placed than others, but it’s hard to say how anyone can get over this, he said. "Look at Saudi Arabia, the war in Yemen, and the business they will lose. It’s a mess.”
In Kuwait, 78 percent of nationals work for the state, and in Saudi Arabia 57 percent, according to the Persian Gulf States Institute.
"You’re already seeing the Saudis cutting their expenses, raising debt, and reining in spending at possibly the worse time, as fiscal stimulus is needed to support their people,” said Dourian.
Persian Gulf economies had been floundering before the corovavirus crisis, with the International Monetary Fund (IMF) warning in a February report that the region’s net wealth could turn negative in less than 14 years.
"The IMF report said that at $20 a barrel, by 2027 the Persian Gulf would become poor, so just seven years from now!” Laury Haytayan, an oil and gas expert at the Natural Resource Governance Institute, told MEE. "Even if oil prices go up to $30, it’s alarming for the region.”
With the length of the coronavirus lockdowns unknown, and economists amending their forecasts on almost a weekly basis, the Persian Gulf states are going to have to borrow money to stay afloat.
Saudi Arabia announced it may borrow $58 billion this year from the international markets, its biggest debt program since 2016. Qatar has raised $10 billion and Abu Dhabi $7 billion.
As Persian Gulf states tighten their belts, military expenditure has also been impacted, with the war in Yemen having cost Saudi Arabia some $5 billion a month.
"To what extent does this explain Saudi Arabia wanting a ceasefire, with the war costing billions of dollars a month? They are trying to reallocate resources that are now more urgent,” said Kristian Ulrichsen, a Baker Institute fellow for the Middle East at Rice University in the U.S.
The triple economic shock to the region may force Persian Gulf rulers to step up to the plate. "The region is at a dangerous crossroads,” said Haytayan.
"There is either a doomsday scenario, with the region plunged again into violence and crackdowns on dissidents, or governments act as real, accountable governments that save their countries, and don’t act like fathers taking care of their kids.”
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