• Reserves down USD144 bn from August 2014 peak Foreign reserves at the Saudi central bank (SAMA) fell USD14.4 bn in Jan to USD602 bn; reserves are down USD144 bn since the peak in August 2014. January’s decline (Fig. 1) can be partially attributed to a M-o-M rise in public spending (shown by a USD9 bn decline in government balance at SAMA – Fig. 2). This contrasts with December 2015, in which foreign reserves fell USD19 bn in spite of a (small) rise in government balances at SAMA. We expect reserves to remain on a declining trend in 2016 despite sharp public spending cuts as oil prices should remain well below the budget break-even oil price of cUSD60-70/bbl. We await the government’s much-anticipated reform programme to assess the plan it intends to use to plug its deficits beyond drawing down on reserves.
• Oil price doesn’t fully explain continued reserves decline Oil prices fell to a new 10-year low in January, and the current account remains under pressure. The monthly price of Brent, which trades at a premium to Saudi blends, fell 18% M-o-M in January to USD31/bbl. Brent fell 36% Y-o-Y in the same month, far outpacing the rapid decline in imports (Fig. 3) that probably reflects both slower economic growth and a stronger dollar. Apart from pressure on the current account and fiscal balances, the rapid fall in reserves could be attributed to falling asset prices, if a portion of SAMA’s reserves are marked to market, or by private capital outflows. We believe a mix of volatile oil prices, uncertainty about future fiscal and subsidy policies, regional political tensions, and a strong USD are all supportive of capital outflows, though it is hard to measure the scale of these outflows in real time.
• Low single digit broad money growth Broad money (M2) growth accelerated slightly to 3.7% Y-o-Y in January, up from 2.6% in December 2015 but down from 7.7% in January 2015. It remained depressed thanks to the drawdown on foreign assets to plug fiscal and external deficits - commercial banks also saw their net foreign asset position deteriorate by USD2.4 billion in January. Domestic asset growth is now the main driver of overall M2 growth. On the liability side, slow money supply growth has been reflected in successive declines in deposits, which fell for the second consecutive month, with the January decline largely driven by businesses and individuals.

Mohamed Abu Basha
Simon Kitchen
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