Saudi Arabia Is Burning Through Its Foreign Reserves at a Record Pace
Here is the opening of this informative report from Bloomberg:
Saudi Arabia is burning through foreign reserves at a record pace as the largesse of the new king and regional turmoil ratchet up pressure on public finances already hurt by the oil price slump.
The kingdom spent $36 billion of the central bank’s net foreign assets -- about 5 percent of the total -- in February and March, the biggest two-month drop on record, data released this week show. The fall was in part due to King Salman’s order to give government employees and pensioners a two-month bonus after he ascended to the throne of the world’s biggest oil exporter in January.
The early months of Salman’s rule also saw a sharpening of the country’s rivalry with Iran -- most strikingly over the Saudi-led air offensive in Yemen -- and mounting security threats at home, challenges that had already led to a surge in military spending in 2014. The 48 percent drop in oil prices last year has prompted the government to use reserves and borrow from domestic banks to maintain spending on wages and investments.
“This is going to be an exceptional year in terms of the drop in reserves,” Monica Malik, chief economist at Abu Dhabi Commercial Bank PSJC, said in an interview in Dubai on Thursday. “Even if oil stabilizes between $70 to $80 a barrel next year, there has to be some rationalization of spending objectives to limit a further deterioration in the fiscal position.”
That chart of Saudi Arabia Foreign Reserves, which you can copy and paste on a blank page to see more clearly, is based on quarterly figures. Therefore, the other dip in reserves for approximately two years occurred in 2008/9.
King Salman’s lavish bribe of two month’s salary for government employees and pensioners will have bought temporary loyalty but it looks like an expensive gamble. I think we will see Brent Crude back in the $70 to $80 a barrel range, and quite possibly before next year if the Dollar Index weakens further in response to Fed intervention, which I have mention in numerous Audios since it briefly moved above 100 on March 13th.
Meanwhile, dwindling reserves of oil producers, especially when supply pushes prices back into the $50 to $40 range, is a recipe for instability. We already see a smouldering Sunni versus Shia war, which can easily flare up in parts of the Middle East and North Africa.
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