Saudi Foreign Reserves Falling Mysteriously

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.

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

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

But net foreign assets have continued to shrink at about the same rate, by $36 billion 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.

Saudi officials have not commented in detail on the reasons for the reserves drop, though some have suggested it is due to private sector activity, not government spending.

Some analysts have speculated the fall is due to spending on Saudi Arabia’s military intervention in Yemen.

This is unlikely; a top Saudi official indicated in late 2015 that the intervention—largely a limited air campaign, not a major ground war—was costing about $7 billion annually, in line with estimates by foreign military experts.

Others speculate capital flight from Saudi Arabia may be sapping the reserves. But data from the central bank—the Saudi Arabian Monetary Authority—on foreign exchange transactions by commercial banks does not support this theory either.

“Capital flight has diminished as an issue. Outflows in 2016 were pretty small compared with 2015, when there were significant outflows,” said an economist at a Saudi bank.

An international banker in touch with Saudi authorities said much of the decline in foreign assets appeared due to the transfer of money to state funds investing abroad—particularly the main sovereign wealth fund, the Public Investment Fund.

Riyadh plans to invest big amounts overseas to win access to technology and boost returns on its capital. The PIF has said it will invest up to $45 billion over five years in a technology fund created by Japan’s Softbank, and $20 billion in an infrastructure fund planned by US firm Blackstone.