Foreign Assets of Saudi Arabia—Since June 1986, the Saudi riyal’s exchange rate to the US dollar has been fixed at SAR 3.7500. Oil exports generate the bulk of Saudi Arabia’s foreign exchange profits, deposited with the Saudi Monetary Agency (SAMA). Government accounts are credited with the corresponding amount of riyals by SAMA, which transfers the money to the government. By selling dollars to local banks against riyals, SAMA meets the country’s public and business sectors’ foreign currency needs.
In 1998, SAMA stopped intervening in the foreign currency market. Because banks can classify this as an off-balance-sheet transaction, this took place in the forward market where speculating is common. When the oil market was weak and foreign exchange reserves were decreasing; there was speculation against the riyal. Recent riyal speculation occurred in 2007/08 due to the excellent balance of payments and fiscal situation of Saudi Arabia, a weaker dollar, and rising inflation in Saudi Arabia. SAMA dealt with this most recent instance by reiterating its long-standing policy of maintaining the exchange rate regime without actual action.
For the most part, Saudi Arabia’s economy is dependent on oil revenues.
Between 2003 and 2011, oil sales accounted for 87% of overall sales.
According to the International Monetary Fund, the non-oil private sector accounts for around 49 percent of real GDP (or 25.5 percent of nominal GDP). During the years 2003 to 2011, real GDP growth in Saudi Arabia averaged 4.5 percent, and the domestic cost of the living index increased by an average of 3.7%. The average budget surplus has been 12.5% of GDP over this period. Over the past few years, Saudi Arabia’s debt/GDP ratio has declined substantially, from a peak of 103.5 percent in 1999 to less than 4 percent now. During the years 2003–2011, the BoP surplus as a percentage of GDP was on average 20.6%.
In the global market, oil exports are priced in dollars; therefore, changing the exchange rate has no impact on competitiveness. This is why the fixed exchange rate regime exists. Because of the fixed exchange rate, riyal interest rates have been able to keep pace with US dollar rates within a margin that reflects domestic market conditions. There is a strict limit on the amount of new currency created in Saudi Arabia, which is stipulated in Article 6 of the country’s Currency Law (Article 6).
If a country’s short-term foreign currency liabilities are substantial and its banking sector is weak, forward intervention in the foreign exchange market could be troublesome.
The country is a net creditor outside of Saudi Arabia and has a well-regulated and well-capitalized banking system. This means that the occasional speculation in the forward market has not been difficult to deal with through intervention or prudential measures. Counterparties gambling against the riyal could be forced to pay for their dollar purchases by SAMA by insisting on actual gross settlement of forwarding transactions (rather than net settlement).
To prevent an offshore riyal market from developing, SAMA has complete control over the supply and availability of riyals.
In a fixed exchange rate arrangement, the Saudi riyal is pegged to the US dollar. There has been no change in the spot rate of USD/SAR since June 1986, since SAMA supplies dollars to domestic banks to meet private sector commercial and financial needs. To curb speculative activity tied to both local and global causes, SAMA FX intervention has been sporadic and limited to the future market. Economic objectives like managing inflation, preserving competitiveness, or reducing the number of FX reserves are all addressed by fiscal measures rather than FX intervention in a pegged exchange rate regime, which is the economy’s nominal anchor.
The Decline in the Foreign Assets of Saudi Arabia
On Tuesday, the central bank of Saudi Arabia said that the kingdom’s net foreign assets declined by SR31.9 billion ($8.5 billion) in January.
Earlier this month, the Saudi Central Bank reported a roughly identical loss in the country’s foreign currency reserves, so the January decline was not unexpected. Approximately two-thirds of Saudi Arabia’s foreign currency reserves are held in “foreign securities,” while the remaining one-third is stored in “foreign currency and deposits overseas.”
Following a fall of $9 billion in December 2021, net foreign assets increased by $13.9 billion in November 2021, resulting in the January 2022 decline.
In 2020 and 2021, SAMA’s net foreign assets declined by $45 billion and $11 billion, respectively. Observers may recollect this information.
Compared to the record high of $737.1 billion established in August 2014, Saudi Arabia’s net foreign assets ended January 2022 at $429.7 billion.
The Foreign Assets of Saudi Arabia Falls Further with Lowered Annual Percentage
In its Monthly Monetary Statistics Bulletin, the Central Bank of Kuwait (CBK) reported that its net foreign assets had fallen by the most significant annual percentage on record.
The central bank’s net foreign assets, mainly foreign currency and bank deposits, decreased by over 390 million dinars ($1.29 billion) in December 2021, bringing the 2021 annual decrease to a total of 1.79 billion dinars.
This was the most significant net annual decline since collected records in 1992.
December’s decline was the second-largest monthly loss this year, behind March’s 821 million dinar reduction.
The CBK’s net foreign assets fell six months in a row in 2021, compared to just three monthly declines in 2020.
There were just three annual declines in CBK’s new foreign assets between 1992 and 2021: 438 million dinars in 1993, 421 million dinars in 2002, and 797 million dinars in 2015.
According to the most recent data from the US Department of the Treasury, Kuwaiti households’ holdings of US Treasuries did not move significantly between January and November 2021, with their value fluctuating between $45 and $47 billion.
In the financial year 2020/2021 (1 April 2020 to 31 March 2020), Kuwait’s fiscal balance deteriorated sharply to a deficit of 15.4 percent due to lower oil revenue, fiscal support measures to ease the pandemic’s effects. A slump in economic activity,” the International Monetary Fund said in a concluding statement of the 2021 Article IV mission for Kuwait issued in October of that year.
The fiscal balance was expected to improve to 2% of GDP in 2021/2022. Still, the statement warned that sustained expenditure pressures and dropping oil prices could lead to a growing deficit and decreased government net assets.
“The fiscal financing has relied mostly on drawing down General Reserve Fund liquid assets,” the International Monetary Fund (IMF) said.