Saudi foreign assets fell the most in Feb

|By Arabian Post Staff| SAMA’s foreign assets fell by US$9.4 billion in February, which is more than the combined US$1 billion drop in government deposits at SAMA and the US$5.3 billion domestic debt issuance, Bank of America-Merrill Lynch said in its latest review. This likely suggests persistent capital outflows for Saudi Arabia, it added

February data suggests domestic liquidity continues to tighten as M3 growth dropped to negative territory alongside weaker point-of-sales consumption data. The report estimates that Saudi Arabia has liquid foreign assets of US$700 billion, which could last 5-6 years at unchanged fiscal policies, and no debt issuance at US$30/bbl. Still, at current oil prices, a radical fiscal policy overhaul is required to stabilize FX reserves.

At US$25/bbl, 4-5pp of GDP annual fiscal consolidation effort is required to keep the Saudi Arabian Monetary Authority’s FX reserves at a third of their level (while exhausting government deposits at SAMA). The review suggests that this could be achieved through capex cuts, value-added tax introduction or subsidy reforms.

BoA-ML believes the 2016 budget announcement is significant for the Saudi Arabian economy because of three main factors. First, it likely marks the end of material overspending practices given tighter spending controls, although there are still questions about the better-than-expected budgetary outturn for 2015.

Second, it starts to introduce a credible medium-term fiscal consolidation strategy to address the oil price slump through revenue and expenditure-side measures, the first round of which saw sweeping energy, water and electricity administered price changes.

Third, it likely signals no near term changes to energy or FX policy, as the adjustment takes place on the fiscal side. Lower public spending should also lead to slower real non-oil GDP growth. The National Transformation Plan (NTP) is likely to be announced by the end of first half of this year and consolidate efforts to implement a medium-term fiscal framework and diversification strategies.