Decline in Saudi FX reserves ‘no cause for alarm’: CE

A decline in Saudi Arabia’s official foreign exchange reserves appears to be driven by the Public Investment Fund (PIF) shifting deposits abroad and off the monetary authority’s balance sheet, Capital Economics said in a recent report, adding that there is no “major cause for alarm.”

The Saudi Arabia Monetary Authority’s (SAMA) FX reserves dropped by $19.3 billion from the start of 2017 until the end of May, broadly in line with the trend over the past couple of years, the London-based consultancy said.

“This has raised eyebrows, particularly in light of the marked improvement in the country’s current account position,” the report noted.

According to recently released data, the Kingdom posted a surplus of $6.2 billion (3.6 percent of GDP) in Q1, compared with deficits of more than $20 billion (almost 15 percent of GDP) in late-2015 and early-2016.

CE said there are a number of “one-off factors” that explain why reserves have continued to fall sharply.

The $17.5 billion international bond sale in November provided had boosted portfolio inflows in Q4 last year, but there was no repeat bond sale in Q1 and portfolio inflows dropped back.

“That meant there was a pick-up in net capital outflows and SAMA needed to sell more FX reserves in order to maintain the dollar peg,” the report said.

The country has also seen a sharp pick-up in outflows through the banking sector, which reached $18.7 billion in Q1.

“A more plausible explanation is that the pick-up in ‘other’ investment outflows represents deposits of the sovereign wealth fund, the PIF, moving off SAMA’s balance sheet,” CE said.