Saudi Currency In Danger As Oil War Escalates; Riyadh Burning Through Foreign Reserves At Unsustainable Rate; Loss Of Confidence In Royal Family Could Come Next

Saudi Currency In Danger As Oil War Escalates; Riyadh Burning Through Foreign Reserves At Unsustainable Rate; Loss Of Confidence In Royal Family Could Come Next
 
www.fortunascorner.com
 
     Ambrose Evans-Pritchard, one of my favorite writers, has an article on The Telegraph’s December 28, 2015 website that might make you uncomfortable if you are a watcher of Saudi Arabia.  Mr. Evans-Pritchard writes that “Saudi Arabia is burning through foreign reserves at an unsustainable rate, and may be forced to give up its prized dollar exchange peg as the oil slump drags on,” the country’s former Reserve Chief [equivalent to our Fed Chair] warned.  “If anything happens to the riyal exchange peg, the consequences will be dramatic,” he added.  “There will be a serious loss of confidence,” said Khalid Alsweilem, the former Head of Asset Management at the Saudi Central Bank, (SAMA).  “But, if the reserves keep going down as they are now, they will not be able to keep this peg,” Mr. Alsweilem told London’s The Telegraph.
 
     Mr. Alsweilem’s “warning came as the Saudi Finance Ministry revealed that the country’s deficit leapt to 367 billion riyals [or about $90B] in 2015, up from just 54 billion riyals in 2014 ,”– a seven-fold increase just for this year. — and, the largest budget in the country’s history.  The International Monetary Fund (IMF), has suggested the country could be running a deficit of around $140B, Mr. Evans-Pritchard writes.  Pretty frightening hemorrhaging of money.  The sustained decline in the price of crude oil and the country’s military involvement in Yemen are two of the main issues getting most of the blame for this record deficit.
     Peter Spence, Economics Correspondent for The Telegraph, writes on the publication’s December 28, 2015 website, that “the Saudi government plans to narrow the deficit to 327B riyals in 2016, by cutting back spending from 975B riyals, to 874B riyals.”  Mr Spence adds that Saudi Arabia “had to resort to tapping foreign reserves, and borrowing from debt markets to finance the cost of war in Yemen, as it also adopted “some procedures” for cutting spending.”
     “It is the first time that the Saudi government has announced its spending plans at a press conference, as officials briefed the media on the extraordinary rise in the government deficit,” Mr. Spence added.  “The country’s government is dependent on oil for about 80 percent of its [yearly] revenue.”
     “Remittances by foreign workers in Saudi Arabia are draining a further $36B a year; and, capital outflows were picking up even before the oil price crash,” Mr. Evans-Pritchard wrote.  Bank of America estimates that the country’s deficit could rise to nearer $180B — if oil prices settle near the $30 per barrel level.  Brent Crude closed lower today, down $1.42 or -3.75 percent to $36.47.
     Dr. Alsweilem told The Telegraph, that “the country does not have  deep enough pockets to wage a long war of attrition in the global crude markets, whatever the superficial appearances.”  “Foreign reserves and assets have fallen to $647B from a peak of $746B in August 2014; but, headline figures often little in the complex world of Central Bank finances and derivatives contracts,” Mr. Evans-Pritchard wrote.
    Dr. Alsweilem , now at Harvard University’s Belfer Center, said “Saudi authorities have taken a big gamble by flooding the world with oil to gain market share and drive out rivals.  The thinking that lower oil prices will bring down the U.S. oil industry [especially frakking and shale extraction] is just nonsense and it won’t work.”  Mr. Evans-Pritchard adds that “this strategy is even controversial within the Royal family.  Optimists hope that this episode will be a repeat of the mid-1980s, when the kingdom pursued the same strategy and succeeded in curbing non-OPEC investment, and preparing the ground for a recovery in prices.  But, the current situation is sui generis,” he wrote.
     “There is an overwhelming feeling among  many in Saudi Arabia that this crisis is just cyclical; and, that it will reverse soon, so everything will be OK.  But, the danger is that what is happening is structural — and that means a country like Saudi Arabia can’t just sit still,” Dr. Alsweilem said.
     “The Saudi government may have unveiled an austerity package of spending cuts and increased taxes, and be looking to slash water and electricity subsidies for the wealthy,” Mr. Evans-Pritchard wrote.  “But, Riyadh has to tread with care.  The country’s cradle-to-grave welfare system is what keeps a lid on dissent and binds the country’s fissiparous policy.”
     “Prince Mohammed bin Salman, the 30 year-old Deputy Crown Prince, now running the country, is trying to push through radical reforms, firing princelings from sinecure positions; and, bringing in an elite team of technocrats to transform Saudi Arabia’s archaic, oil-based economy,” Mr. Evans-Pritchard writes.  “He is drawing on a McKinsey Study – ‘Beyond Oil’ – that sketches how the country can break its unhealthy dependence on crude, and double GDP by 2030 — with a $4T investment blitz across eight industries;  from petrochemicals, to metals, steel, aluminum smelting, cars, electrical manufacturing, tourism, and health care.”
     “The underlying message of the [McKinsey] report, is that Saudi Arabia faces disaster, unless it can overcome its resources curse — and reinvent itself fast, and this includes an acceptance that women must be drawn into the workforce,” Mr. Evans-Pritchard wrote.  
     “The warnings have been seized on with alacrity by Prince Mohammed, to confront vested interests.  The public debt to GDP ratio will reach 140 percent by 2030; and, the deficit will still be in the double digits, if only partial reforms are pushed through.  That course implies bankruptcy,” The Telegraph warns.
     When you read this, you understand Professor Niall Ferguson’s warning that “Saudi Arabia could be Iran 1979,” all over again.  This is a country where taxes are virtually unheard of.  What is being considered here is nothing short of a watershed turning point for the kingdom.  As Shakespeare so eloquently put it so many years ago, in Henry IV, “Uneasy lies the head, that wears the crown.”  V/R, RCP
www.fortunascorner.com
 
     Ambrose Evans-Pritchard, one of my favorite writers, has an article on The Telegraph’s December 28, 2015 website that might make you uncomfortable if you are a watcher of Saudi Arabia.  Mr. Evans-Pritchard writes that “Saudi Arabia is burning through foreign reserves at an unsustainable rate, and may be forced to give up its prized dollar exchange peg as the oil slump drags on,” the country’s former Reserve Chief [equivalent to our Fed Chair] warned.  “If anything happens to the riyal exchange peg, the consequences will be dramatic,” he added.  “There will be a serious loss of confidence,” said Khalid Alsweilem, the former Head of Asset Management at the Saudi Central Bank, (SAMA).  “But, if the reserves keep going down as they are now, they will not be able to keep this peg,” Mr. Alsweilem told London’s The Telegraph.
 
     Mr. Alsweilem’s “warning came as the Saudi Finance Ministry revealed that the country’s deficit leapt to 367 billion riyals [or about $90B] in 2015, up from just 54 billion riyals in 2014 ,”– a seven-fold increase just for this year. — and, the largest budget in the country’s history.  The International Monetary Fund (IMF), has suggested the country could be running a deficit of around $140B, Mr. Evans-Pritchard writes.  Pretty frightening hemorrhaging of money.  The sustained decline in the price of crude oil and the country’s military involvement in Yemen are two of the main issues getting most of the blame for this record deficit.
     Peter Spence, Economics Correspondent for The Telegraph, writes on the publication’s December 28, 2015 website, that “the Saudi government plans to narrow the deficit to 327B riyals in 2016, by cutting back spending from 975B riyals, to 874B riyals.”  Mr Spence adds that Saudi Arabia “had to resort to tapping foreign reserves, and borrowing from debt markets to finance the cost of war in Yemen, as it also adopted “some procedures” for cutting spending.”
     “It is the first time that the Saudi government has announced its spending plans at a press conference, as officials briefed the media on the extraordinary rise in the government deficit,” Mr. Spence added.  “The country’s government is dependent on oil for about 80 percent of its [yearly] revenue.”
     “Remittances by foreign workers in Saudi Arabia are draining a further $36B a year; and, capital outflows were picking up even before the oil price crash,” Mr. Evans-Pritchard wrote.  Bank of America estimates that the country’s deficit could rise to nearer $180B — if oil prices settle near the $30 per barrel level.  Brent Crude closed lower today, down $1.42 or -3.75 percent to $36.47.
     Dr. Alsweilem told The Telegraph, that “the country does not have  deep enough pockets to wage a long war of attrition in the global crude markets, whatever the superficial appearances.”  “Foreign reserves and assets have fallen to $647B from a peak of $746B in August 2014; but, headline figures often little in the complex world of Central Bank finances and derivatives contracts,” Mr. Evans-Pritchard wrote.
    Dr. Alsweilem , now at Harvard University’s Belfer Center, said “Saudi authorities have taken a big gamble by flooding the world with oil to gain market share and drive out rivals.  The thinking that lower oil prices will bring down the U.S. oil industry [especially frakking and shale extraction] is just nonsense and it won’t work.”  Mr. Evans-Pritchard adds that “this strategy is even controversial within the Royal family.  Optimists hope that this episode will be a repeat of the mid-1980s, when the kingdom pursued the same strategy and succeeded in curbing non-OPEC investment, and preparing the ground for a recovery in prices.  But, the current situation is sui generis,” he wrote.
     “There is an overwhelming feeling among  many in Saudi Arabia that this crisis is just cyclical; and, that it will reverse soon, so everything will be OK.  But, the danger is that what is happening is structural — and that means a country like Saudi Arabia can’t just sit still,” Dr. Alsweilem said.
     “The Saudi government may have unveiled an austerity package of spending cuts and increased taxes, and be looking to slash water and electricity subsidies for the wealthy,” Mr. Evans-Pritchard wrote.  “But, Riyadh has to tread with care.  The country’s cradle-to-grave welfare system is what keeps a lid on dissent and binds the country’s fissiparous policy.”
     “Prince Mohammed bin Salman, the 30 year-old Deputy Crown Prince, now running the country, is trying to push through radical reforms, firing princelings from sinecure positions; and, bringing in an elite team of technocrats to transform Saudi Arabia’s archaic, oil-based economy,” Mr. Evans-Pritchard writes.  “He is drawing on a McKinsey Study – ‘Beyond Oil’ – that sketches how the country can break its unhealthy dependence on crude, and double GDP by 2030 — with a $4T investment blitz across eight industries;  from petrochemicals, to metals, steel, aluminum smelting, cars, electrical manufacturing, tourism, and health care.”
     “The underlying message of the [McKinsey] report, is that Saudi Arabia faces disaster, unless it can overcome its resources curse — and reinvent itself fast, and this includes an acceptance that women must be drawn into the workforce,” Mr. Evans-Pritchard wrote.  
     “The warnings have been seized on with alacrity by Prince Mohammed, to confront vested interests.  The public debt to GDP ratio will reach 140 percent by 2030; and, the deficit will still be in the double digits, if only partial reforms are pushed through.  That course implies bankruptcy,” The Telegraph warns.
     When you read this, you understand Professor Niall Ferguson’s warning that “Saudi Arabia could be Iran 1979,” all over again.  This is a country where taxes are virtually unheard of.  What is being considered here is nothing short of a watershed turning point for the kingdom.  As Shakespeare so eloquently put it so many years ago, in Henry IV, “Uneasy lies the head, that wears the crown.”  V/R, RCP

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