China might be the most talked about country when it comes to selling currency reserves, but it certainly is not the only one doing it. Considering that oil prices have more than halved in the past year, Saudia Arabia has also been forced to make up for its income shortfall by selling some of the foreign debt it owns.
The world’s top oil producer and OPEC’s largest member started selling its reserves even before China announced its record drawdown of currency reserves. to help cover the requirements of the budget which is 90% financed by oil exports. As a result, Saudi Arabia has seen its net foreign assets go down by $30 billion in February and March, which is the largest two-month drop so far recorded, contributing to a total of nearly $60 billion in the last 10 months alone.
Additional fears for the country’s budget comes from the slowdown of Chinese economy as China and Saudi Arabia have established closer bilateral ties in the past several years, making Saudi Arabia the largest supplier of crude oil for the always energy hungry China, the world’s second biggest economy.
The use of its reserves might have helped the budget, but has not been good for the country’s macro-economic issues. Last month the ratings agency Fitch revised the outlook for Saudi Arabia to “negative” due to the lack of an effective fiscal policy response to the drop in oil prices.
Even worse, the ongoing issue over the growing deficit may devalue the riyal. While this prospect is not yet imminent, the continuous delays to fiscal reforms are increasing the outside perceptions of risk regarding the sustainability of Saudi Arabia’s current fiscal path and its influence in the region. Worst case is that, without some major changes, the situation could end up undermining the sovereign state’s creditworthiness for the medium term as the country’s debt starts to rise.