Financial troubles are looming in Saudi Arabia, as the country has taken nearly $70 billion from global asset managers in an attempt to curb its budget deficit.
The country is attempting to stop the decline of its finances, as oil prices have fallen by 50% during the past year. Saudi Arabia is one of the largest oil producers in the world, and it represents roughly 80% of the country's revenue.
The foreign-held reserves of the Saudi Arabian Monetary Authority (SAMA) have fallen roughly 10% since their $737 billion peak in August of 2014. These reserves stood at $661 billion as of July. In order to help maintain spending, the Saudi Arabian government is accelerating bond sales.
CEO of the Dubai-based company Insight Discover Nigel Silltoe said, "Fund managers we’ve spoken to estimate SAMA has pulled out between $50 billion to $70 billion from global asset managers over the past six months. Saudi Arabia is withdrawing funds because it’s trying to cut its widening deficit and it’s financing the war in Yemen.”
Silltoe refused to name the fund managers in question.
Dumping its foreign-exchange reserves is a rather unusual trend for the historically progressive country of Saudi Arabia. However, economists are not surprised by the country’s recent actions.
Economist Jason Tuvey said, “Foreign-exchange reserve depletion, rather than accumulation, is the new reality for Saudi Arabia. None of this should come as much surprise, given the current-account deficit and risk of capital flight.”
Because of Saudi Arabia’s major dependence on oil, the budget deficit of the country might increase to 20% of its gross domestic product (GDP) this year. SAMA is planning to raise somewhere between $24 billion and $27 billion in bonds prior to the end of this year. The country is trying to shift its economy somewhat away from oil in an attempt to diversify.
However, analysts are worried that Saudi Arabia’s dumping of foreign-exchange reserves to avoid additional cost-cutting could harm the country’s credit rating. The government of Saudi Arabia has been unclear on how exactly it plans to cut spending. Some possible plans include cutting fuel subsidies and investing capital into renewable energy sources.
Capital in Saudi Arabia has been continuously depleted because of oil subsidies, its military efforts in Yemen, and public hand-outs. The International Monetary Fund (IMF) estimates that the budget deficit in Saudi Arabia will exceed $108 billion by the end of this year. About 30 million people live in Saudi Arabia.
Meanwhile, other countries in the region are experiencing great financial success. Qatar plans to invest roughly $35 billion in the United States during the next five years, as the country wants to distance itself from deals in Europe. The country also plans to engage in a $10 billion investment with the Citigroup of China. Qatar is the world’s richest country per capita, and it is predicting a budget surplus by the end of the year.