World Economy

Saudi Foreign Reserves Shrink

Saudi Foreign Reserves ShrinkSaudi Foreign Reserves Shrink

Foreign assets at Saudi Arabia’s central bank shrank $6 billion in April as it liquidated some financial holdings to cover a big state budget deficit caused by low oil prices, official data showed, Arabian Business reported.

Net foreign assets dropped 1.1% from the previous month to 2.15 trillion riyals ($572 billion). Assets fell 15.7% from a year earlier to their lowest level since April 2012; they reached a record high of $737 billion in August 2014 before starting to shrink.

The foreign assets are mainly denominated in US dollars, in the form of securities such as US Treasury bonds and deposits with banks abroad, fund industry sources told Reuters.

Earlier this month, the US Treasury disclosed the size of Saudi Arabia’s US Treasury holdings for the first time. It said the kingdom owned $116.8 billion of treasuries in March.

Deposits with banks abroad fell 2.2% from the previous month to $129 billion in April, while investment in foreign securities edged down 0.8% to $386 billion.

  Exchange Rate

Saudi Arabia would not benefit from altering its exchange rate policy and does not intend to do so, its new central bank governor told the state-linked Al Arabiya channel in a televised phone call.

Ahmed al-Kholifey said the riyal has been suffering due to market speculation that the policy might change.

The riyal’s peg of 3.75 to the US dollar has been a cornerstone of Saudi policy since 1986. But the collapse of oil prices since 2014, which created a $100 billion state budget deficit, has fuelled speculation in financial markets over whether it can be sustained.

Saudi Arabian Monetary Agency researchers published a paper last month, stressing that keeping the peg was probably the best course for Saudi Arabia in the near future, but suggesting it may need to change if economic conditions shift.

  Economy to Slow

The Saudi economy is expected to slow sharply this year because of state spending cuts, according to the International Monetary Fund, while US interest rates have begun to rise in line with an economic recovery there.

The IMF has also shown signs of recognizing that the riyal may need to fall at some point. After annual consultations with Riyadh last week, it said: “The exchange rate peg to the US dollar continues to serve Saudi Arabia well given the structure of the economy.”

But in a paper presented to a meeting of Arab finance ministers last month, the IMF said efforts by oil-exporting countries to diversify their economies could fail if their currencies became overvalued, hurting non-oil export industries.

Such considerations may keep speculation about an eventual devaluation of the riyal.