Saturday, September 2, 2017

The Bleeding Has Not Stopped -- Saudi Sovereign Fund Plunges -- KSA Could Deplete Assets Within 5 Years -- September 2, 2017

And this was well before continued cuts to the US; and, Hurricane Harvey which shut down the largest refinery in the US, Motiva, owned and operated by Saudi Arabia.

In the Hurricane Harvey aftermath, WTI plunged to $46. 

Last month's data (May, 2017) suggested that perhaps the bleeding had stopped for Saudi Arabia, but apparently not. Source: tradingeconomics.

See tags for previous charts.

Let's see what the press is reporting on this story.

First, from aljazeera: the mysterious fall in Saudi foreign reserves -- June 27, 2017. Net foreign assets falling despite narrower budget deficit, mystifying economists and diplomats monitoring Riyadh.
Net foreign assets at Saudi Arabia's central bank, a measure of its ability to support its currency, look set to fall sharply this year as oil prices slump and Riyadh expands its sovereign wealth fund to invest abroad, according to a report by Reuters news agency.

They shrank from a record high of $737bn in August 2014 to $529bn at the end of 2016 as the government liquidated some assets to cover the huge budget deficit caused by the fall in oil prices.

This year, an austerity drive and a partial rebound in oil prices have helped Riyadh make progress in cutting the deficit - which narrowed 71 percent from a year ago to 26 billion riyals ($6.9bn) in the first quarter.

But net foreign assets have continued to shrink at about the same rate, by $36bn in the first four months of 2017 - a mystery to economists and diplomats monitoring Saudi Arabia, and a potential blow to markets' confidence in Riyadh.

"This suggests that there remains a significant deficit in the balance of payments of Saudi Arabia, which is not due to declining oil export revenues," said Khatija Haque, head of regional research at Emirates NBD, Dubai's biggest bank.
Reuters also called it "mysterious" on June 27, 2017.

Second, again from  aljazeera: Saudi Arabia's foreign reserves resume falling in July -- August 25, 2017 (published just last week).
Central bank data suggests Saudi government may remain under pressure to draw reserves down to cover its budget deficit.

Saudi Arabia's foreign reserves resumed falling in July, according to data published by the country's central bank on Thursday.

The figures suggested that the government may remain under pressure to draw reserves down to cover a budget deficit caused by low oil prices.

Riyadh began liquidating the reserves in late 2014, and they dropped sharply from a record $737bn in August that year.

In June 2017, they rose month-on-month for the first time in over a year, prompting speculation that Riyadh might have cut its deficit enough to no longer need cash from the reserves.

But Thursday's data showed the central bank's net foreign assets fell by $6.3bn from June to $487bn in July, their lowest level since early 2011.
Third, zerohedge had this headline back in May 29, 2017: economists puzzled by unexpected plunge in Saudi foreign reserves.
The stabilization of oil prices in the $50-60/bbl range was meant to have one particular, material impact on Saudi finances: it was expected to stem the accelerating bleeding of Saudi Arabian reserves. However, according to the latest data from Saudi Arabia’s central bank, aka the Saudi Arabian Monetary Authority, that has not happened and net foreign assets inexplicably tumbled below $500 billion in April for the first time since 2011 even after accounting for the $9 billion raised from the Kingdom's first international sale of Islamic bonds.
As the chart below shows, according to SAMA, Saudi net foreign assets fell by $8.5 billion from the previous month to $493 billion the lowest in six years, bringing the decline this year to $36 billion. Over the past three years, Saudi foreign reserves have dropped by a third from a peak of more than $730 billion in 2014 after the plunge in oil prices, prompting the IMF to warn that the kingdom may run out of financial assets needed to support spending within five years.

One could go on and on, I suppose, but one pretty much gets the picture at this point. This may explain why Saudi Arabia did the unthinkable last month: it met with Iraq to strengthen ties against their common enemy: Iran.

Note the x-axis on the graph above: note that time frame -- we're not talking decades, we're talking about three years.

My hunch: we're going to see some policy changes in Saudi Arabia over the next few months. The King cannot possibly be happy with his new finance minister. 

By the way, and this is huge: I said when I first started following this story some months ago, that it appeared Saudi's foreign reserve assets were falling about $3 to $5 billion month-over-month. Anything over $5 billion should get everyone's attention. But now as the assets dwindle, on a percentage basis, $3 to $5 billion is a much bigger loss. So, the $8.5 billion loss, month-over-mont, just reported by zerohedge above is quite remarkable. 

For the most recent data posted, it appears Saudi's foreign reserves were, in millions:
  • May, 2017: 1,875,000 Riyals
  • June, 2017, 1857,500 Riyals,
  • exchange rate: 1 Saudi Riyal = $0.27
  • so, 1,875,000 million = $506,250 million
  • and, 1,857,500 million = $501,525 million
  • so, from $506.25 billion down to $501.525 billion suggests another drop of $4.725 billion, month-over-month, June to July, 2017
On yet another note, I can't find it right now, but I believe early on in this exercise, zerohedge (or someone) suggested that at the rate KSA was hemorrhaging cash, the kingdom could deplete its foreign reserves in nine years. I don't recall for sure, but if that's correct, the new calculation suggesting the kingdom could deplete its foreign reserves in five years is almost beyond shocking. 

Disclaimer: I often make simple arithmetic errors. If this information is important to you, go to the source. 

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