Saudi Arabia tucks away billions in oil money for next year

Saudi Arabia will hold billions of dollars from its oil windfall in a government current account until the end of the year and only then decide how to distribute the money, a shift in its strategy from previous boom periods.

In the past, higher oil prices and output would quickly translate into rising foreign reserves and deposits in local banks, and often lead to a swift boost in the government’s spending. But this time, it will wait until “after the surplus is realised, which means after the closing of the fiscal year” in December, according to Finance Minister Mohammed Al-Jadaan.

In a statement to Bloomberg, Al-Jadaan said the government won’t spend the money until it’s rebuilt reserves depleted during eight years of subdued oil prices. It could then use some of the cash to repay debts and pour it into state investment vehicles, including the powerful Public Investment Fund and the National Development Fund, which focuses on domestic infrastructure.

“The surplus achieved in the first quarter is shown in the government current account and has not yet been deposited to government reserves nor transferred to other groups,” he said.

The comments explain why the oil bounty has so far left little trace in the economy of the world’s largest crude exporter. The government’s current account held at the central bank rose by SAR70bn ($19bn) in the first quarter of the year, when Saudi Arabia reported a $15bn budget surplus.

Saudi Arabia has seen revenues soar on the back of $100 oil and rising production. Oil gross domestic product is expected to grow 19 per cent this year, Al-Jadaan said at the World Economic Forum in Davos, Switzerland. If crude prices remain that high, the kingdom’s total oil exports may reach an estimated $287bn this year, according to Ziad Daoud, chief emerging markets economist at Bloomberg Economics.

As part of a programme to decouple the economy from the volatility in oil prices, Al-Jadaan said the government has set what he called the lower and higher bands for the level of its reserves as a share of GDP. The goal is “to protect our fiscal position from potential shock in the future,” he said.

Officials had previously said that much of the extra money would be used to accelerate efforts to diversify the economy away from oil – currently Saudi Arabia’s main source of income.

“The windfall from the additional revenues that we will get from high oil prices will be essentially invested in resilience,” Faisal Alibrahim, minister of economy and planning, told Bloomberg in an interview at Davos. “Whether it’s replenishing reserves, paying off debt or investing in unique transformational projects through our wealth fund, that really helps us accelerate the diversification plans.”

The kingdom’s $600bn sovereign wealth fund, known as the PIF, is at the heart of Prince Mohammed bin Salman’s plan to overhaul the economy and invest in new non-oil industries like tourism. It owns most of the kingdom’s mega-projects, including Neom – a $500bn new city – as well as tourism developments on the Red Sea coast and a massive entertainment complex planned near Riyadh.

“The responsibility of boosting growth has shifted to state-owned entities ex-budget, led by PIF,” Mohamed Abu Basha, head of macroeconomic research at Egyptian investment bank EFG Hermes, wrote in a note. That leaves “the transmission of high oil prices to the economy more indirect than at any time in history.”

Reserves jumped in March, supported by dividend payments from oil giant Aramco. But the increase was smaller than it was in the same period last year, when oil prices averaged above $60 a barrel.

One part of the economy that hasn’t benefited is the domestic banking system. In the past high oil prices would mean an influx of cheap deposits into the Saudi banks, helping to keep local currency lending rates low. Yet Saudi banks are facing the tightest liquidity conditions since 2016, as measured by the three-month Saudi Interbank Offered Rate, or Saibor, despite soaring oil prices. It took off even before 75 basis points in cumulative interest-rate hikes by the US Federal Reserve so far this year.

The finance ministry said that money supply was ample. “The increase in Saibor rates reflects some of the lag between the surge in oil prices and the domestic liquidity boost,” said Carla Slim, economist at Standard Chartered. “Excess liquidity in the banking system, as measured by volumes deposited in Saudi Arabian Monetary Authority’s reverse repo facility, has contracted sharply.”