Saudi Arabia faces a vicious liquidity squeeze as capital continues to leak out the country, with a sharp contraction of the money supply and mounting stress in the banking system.
Three-month interbank offered rates in Riyadh have suddenly begun to spiral upwards, reaching the highest since the Lehman crisis in 2008, Telegraph online reported.
Reports that the Saudi government is to pay contractors with tradable IOUs show how acute the situation is becoming. An IOU is not a negotiable document and does not specify repayment terms such as the time of repayment.
The debt-crippled bin Laden group, close to the ruling clique, has laid off 50,000 construction workers as austerity bites in earnest.
Societe Generale’s currency team has advised clients to short the Saudi riyal, betting that the country will be forced to ditch its long-standing dollar peg, a move that could set off a cut-throat battle for global share in the oil markets.
Francisco Blanch, from Bank of America, said a rupture of the peg is this year’s number one “black swan event” and would cause oil prices to collapse to $25 a barrel. Saudi Arabia’s foreign reserves are still falling by $10 billion a month, despite a switch to bond sales and syndicated loans to help plug the huge budget deficit.
The country’s remaining reserves of $582 billion are in theory ample–if they are really liquid–but that is not the immediate issue. The problem for the Saudi central bank, SAMA, is that reserve depletion automatically tightens monetary policy.
Bank deposits are contracting. So is the M2 money supply. (A measure of money supply that includes cash and checking deposits (M1) as well as near money). Domestic bond sales do not help because they crowd out Saudi Arabia’s wafer-thin capital markets and squeeze liquidity. Riyadh now plans a global bond issue.
While crude prices have rallied 80% to almost $50 a barrel since mid-February, this has not yet been enough to ease Saudi Arabia’s financial crunch.
US inventories are still hovering at record levels. Data from the US Energy Department showed a rise of 1.31 million barrels in the week to May 13. “The supply glut seems persistent. Oil could well fall to a new low for the year,” said Ben Combes from Llewellyn Consulting.
Eventually the next cyclical oil spike will come to the rescue. The question is whether the Saudis can batten down the hatches and make it through the financial storm in a very leaky ship.
Public-Private Partnerships
Saudi Arabia may establish a unit in the ministry of economy and planning focused on pulling together public-private partnerships that will help the government cut costs and improve efficiency, according to people familiar with the matter, Bloomberg reported.
The division would aim to boost the role of the private sector in planning, financing and delivering projects and services for the government, the people said, asking not to be identified because the information is private. A decision on whether to move ahead is expected in the next few weeks, the people said. Officials from Riyadh held meetings with PPP specialists from the UK to discuss the idea and how best to implement the policy, the people said.
Saudi Arabia is undergoing its biggest ever economic shakeup, led by Deputy Crown Prince Mohammed bin Salman, as it prepares for the post-oil era following the plunge in crude prices that started in 2014, the kingdom’s main source of revenue. One of the government’s biggest challenges will be navigating the worst economic slowdown since the global financial crisis as authorities cut spending to plug a budget deficit that reached about 15% of gross domestic product in 2015.
Under the rule of King Abdullah bin Abdulaziz Al Saud, who died in 2015, the country was wasting as much as $100 billion a year because of inefficient spending, according to Minister of State Mohammed Al-Sheikh. The country has slowed payments to contractors and suppliers, started borrowing from local and international banks, and tapped the country’s foreign reserves to deal with runaway spending and lower income from oil’s slump.
