Crude Economics
Saudis Feel the Squeeze

Saudi Arabia spent 5 percent of its massive rainy-day fund in February and March, the largest two-month total on record for the petrostate. Low oil prices and bonuses for pensioners and government workers cost the central bank $36 billion in foreign assets, the FT reports:

The central bank’s foreign reserves have dropped by $36bn, or 5 per cent, over the past two months, as newly crowned King Salman bin Abdulaziz al-Saud dips into Riyadh’s rainy-day fund and increases domestic borrowing to fund public sector salaries and large development projects.

The latest data show Saudi’s foreign reserves dropped by $16bn to $708bn in March, driven by public sector bonuses paid by King Salman after he assumed power in January. This follows a fall of $20bn in February. Saudi Arabia has spent $47bn of foreign reserves since October.

The new king has also promised bonuses to those in the military fighting Houthi rebels in Yemen, a politically motivated decision that will further drain the country’s sovereign wealth fund. This comes at a time when bargain crude prices are expected to raise the Saudi budget deficit to nearly 15 percent of its GDP this year.

Saudi Arabia’s foreign reserves still exceed $700 billion, so Riyadh can still stomach low prices for the time being. The rest of OPEC isn’t nearly as well prepared, however, and many of the cartel’s members have taken to publicly agitating for production cuts as a way to push crude prices upwards. So far the Saudis have resisted these calls, preferring instead to weather the low prices to compete for market share, but that tune may change if they have to continue to burn through their foreign reserves.

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