Saudi capital outflows could represent sovereign fund investments: CE

Capital outflows from Saudi Arabia have increased over the past year and a half, but the bulk of this seems to reflect ongoing foreign investments by the Kingdom’s sovereign wealth fund, the Public Investment Fund (PIF), London-based Capital Economics said on Thursday.

“A bigger concern from the point of view of the dollar peg would be stronger private outflows, perhaps triggered by a drop in oil prices,” the consultancy said in a note.

Net capital outflows amounted to almost 5 percent of GDP in Q1, compared with inflows of 1.7 percent of GDP in late-2016.

There are two strands to the pick-up in net capital outflows, CE said, noting that the first is that there has been a further slowdown in foreign direct investment (FDI) into Saudi Arabia.

FDI inflows have fallen from an average of around 1 percent of GDP in 2014-16 to just 0.3 percent of GDP in Q1.

Secondly, there has been a major swing in net “other” investment – mainly banking sector – flows.

Saudi Arabia recorded net “other” investment outflows of more than 5 percent of GDP in the first quarter, compared with inflows of around 1 percent of GDP in 2016. One reason behind this could be a jump in Saudi residents placing banking deposits abroad.

“Perhaps a more compelling explanation, though, is that the sovereign wealth fund, the Public Investment Fund, has been placing deposits abroad before undertaking foreign equity investments. This was a factor behind the slide in FX reserves early last year,” said Jason Tuvey, senior emerging markets economist at CE.

Earlier this week, a Saudi central bank official said that foreign reserves at the Saudi Arabian Monetary Authority (SAMA) have been increasing this year, and much of the recent capital outflows have been due to foreign investment by the Kingdom’s other institutions

Saudi institutional investors have been exchanging local currency at SAMA for hard currency that would be used to invest abroad, which could explain the slow pace of increase in foreign assets this year, he added.

The rise in capital outflows over the past 18 months explains why Saudi Arabia’s foreign reserves have not risen at a faster pace, given positive economic factors like higher oil prices and weaker imports and remittances. 

Looking ahead, if oil prices to fall to $60 per barrel by end-2019, as CE expects, the drawdown of FX reserves is likely to resume, the report said.

“That may trigger fresh fears over the sustainability of the dollar peg. But we suspect that the government would force the PIF to slow its foreign investments if significant strains emerged,” Tuvey added, noting that a greater concern would be if lower oil prices triggered a pick-up in private capital outflows.