Saudi's foreign assets cushion setbacks

Saudi Arabia has amassed huge foreign assets from its petrodollar surpluses over the past seven oil boom years as a short-term investment intended to cushion economic setbacks, according to its central bank governor.

The Saudi Arabian Monetary Agency (Sama) said such funds are used by the government to finance its budget when oil prices decline to keep growth in the domestic economy and ensure jobs for its citizens.

Sama's Governor Hamad Al Sayari said the Gulf Kingdom, the world's oil powerhouse, differs from other oil producers in the region as it has a relatively large population with much higher development needs.

"Saudi Arabia has a large and growing population, and it is quite different from some other countries which have relatively small populations," Al Sayari told Oxford Business Group in an interview sent to Emirates Business.

"In their case, they can reasonably look at their foreign assets as a long-term wealth fund. In our case, the flow of funds from oil, which is a finite resource, is being used to build a robust and diversified economy that will employ the growing Saudi workforce….government spending plays an important role in creating this environment, and fiscal policy is also used in a counter-cyclical manner."

He said oil producers, which heavily depend on crude exports for their income, have a pattern of "highly volatile growth and recession."

"We need to lower this volatility in our economy… when oil income is low, the government runs a budget deficit and Sama's foreign assets fall, as was the case in the 1980s and the 1990s," he said.

"When oil income is high, as it is today, the government runs a budget surplus and repays its debt. Sama's foreign assets rise so that we build up external and domestic surpluses."

Sama's figures showed Saudi Arabia had withdrawn nearly SR101 billion (Dh100bn) in the first quarter of 2009 to finance the record budget it approved for 2009 in a bid to mitigate the impact of the global financial crisis.

Although the Kingdom recorded its highest budget surplus in 2008 because of strong crude prices, Sama's assets declined from around SR1,709.99bn (Dh1,692bn) at the end of December to nearly SR1,608bn at the end of March, Sama said in its monthly report for April.

The decline reversed several years of a steady and rapid growth in Sama's assets because of a sharp rise in the country's oil export revenues.

"Sama's foreign assets are diversified and invested in high-grade marketable securities. Some of the assets are managed within Sama, and some are allocated to professional investment management companies," Al Sayari said.

"Sama's main objective is to optimise risk-adjusted return with due regard to liquidity and safety. In terms of the future, it is important to understand the role that Sama's foreign assets play in our overall fiscal and monetary policy."

Strong crude prices through most of 2008 allowed the Gulf Kingdom, the largest Arab economy, to record its highest ever budget surplus last year of nearly SR590bn (Dh584bn).

This has enabled it to sharply boost its foreign assets and slash its public debt to less than 15 per cent of the gross domestic product after surpassing the GDP in late 1999.

Sama's figures showed deposits with banks abroad slumped from SR379.4bn at the end of December to SR314.9bn at the end of March.

Investment in foreign securities, after remaining unchanged at the end of January, plummeted from around SR1,154.2bn to SR1,114.5bn at the end of March.

Buoyed by the sharp rise in its revenues last year, Saudi Arabia announced record spending for 2009 as it is striving to keep the domestic economy on track and reassure local and foreign investors.

Spending was projected SR475bn and revenue at SR410bn, leaving a deficit of SR65bn.

But experts believe actual expenditure would be higher as the Kingdom has traditionally overshot forecast spending over the past years, depending on the oil market conditions.

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