Saudi Arabia can’t stop burning through its foreign cash

REUTERS/Stephanie KeitBuddhist mourners burn fake money during a candlelight vigil for slain New York Police Department (NYPD) officer Wenjian Liu one day ahead of his funeral in Manhattan, New York January 3, 2015.

Saudi Arabia, the Gulf State which is taking a beating from the crash in oil prices, got another chunk of bad news on the state of its economy.

In a note released by analysts Simon Williams and Razan Nasser, HSBC shows that in February, the country’s foreign-exchange holdings took another big dive, adding to the massive losses in foreign currencies held by the oil rich nation seen in the past couple of years.

HSBC shows that FX reserves dropped by more than $9 billion (£6.2 billion) in February, falling to their lowest level in nearly four years, and continuing their inexorable slide lower. Reserves had fallen by £14 billion (£9.7 billion) in January.

The amount of reserve assets held by the Saudi government now stands at $593 billion (£411 billion), more than $150 billion (£104 billion) down from its recent peak in late 2014, just before oil prices started plummeting. Here’s what HSBC had to say (emphasis ours):

Saudi Arabia’s FX reserves stood at USD593bn in February – a m-o-m drop of USD9.4bn. The pace of decline was the most modest in four months but remained large, and leaves central bank foreign assets down more than USD150bn since oil prices began to decline in late 2014, to reach their lowest levels since mid-2012. The decline comprised a USD4.6bn drop in the Central Bank’s deposits held abroad and a USD2.8bn drop in investment securities. Even the typically stable SDR holdings and reserve position with the IMF declined USD2bn.

And here’s the chart:

HSBC

The amount of money held in foreign reserves by the Gulf State has fallen in almost direct proportion to the price of oil over the past 18 months. The world’s most crucial commodity has lost about 60% of its value since mid-2014, falling from more than $100 (£72.17) a barrel to as low as $28 per barrel in late January, thanks largely to sluggish demand, and a huge oversupply. It has since recovered to around $39 right now, but that huge decline is clearly having a massive impact on Saudi Arabia.

Saudi Arabia, along with its fellow OPEC members, has strongly resisted calls to cut the amount of oil it produces, though it did recently agree to a freeze in production, and is set to meet other oil producers in Qatar in April to discuss the conditions for that proposed freeze.

The country is now running a massive budget deficit, just shy of $100 billion (£72.2 billion), as it refuses to cut spending even though oil receipts are down. This led to Business Insider’s Lianna Brinded to argue that the country’s refusal to cut production of oil is effectively “killing” its economy.

While the big decline in foreign exchange reserves is pretty worrying news for the Saudi economy, the news is not all completely terrible, and in February, reserves declined at their lowest levels in four months, suggesting that a slowdown in how much the country has to use of its reserves could be on its way.

Saudi Arabia is not the only major economy that has seen foreign-exchange reserves drop massively in the past couple of years. Earlier in March, Business Insider reported that the global slowdown had led China to expend more than $800 billion (£577 billion) of FX reserves since the middle of 2014.