By Stephen Kalin
RIYADH -- Saudi Arabia's foreign reserves dropped sharply in April as the kingdom kept its peg with the U.S. dollar steady while transferring a chunk to its sovereign-wealth fund to bet on stocks beaten down by the coronavirus pandemic.
The kingdom's reserves in recent years have hovered around the $500 billion level, held by its central bank in mostly low-risk assets such as U.S. Treasurys. The implied stability allowed officials to maintain the Saudi riyal's peg to the dollar and demonstrate the kingdom's financial strength as it raised billions in debt to help fund an ambitious spending plan.
Total foreign reserve assets fell by $24.7 billion in April to about $448.6 billion, according to the latest data posted Sunday by the central bank, known as the Saudi Arabian Monetary Authority. They had fallen by $23.9 billion in March -- the largest single-month drop going back two decades.
That decline came as the central bank transferred $40 billion to the Public Investment Fund over March and April for a buying spree of international stocks amid the financial fallout of the pandemic. Saudi Finance Minister Mohammed al-Jadaan has indicated the transfer was a one-off transaction to take advantage of the opportunity.
However, it opens the doors for further such disbursements and weakens the central bank's safety net as oil prices remain low and the pandemic drags on, analysts and bankers say.
"It's not as if, for example, there is a pocket of SAMA reserves that we know are never going to be touched as long as the peg is there," said Hasnain Malik, a Dubai-based emerging-markets equities strategist at Tellimer. "And we don't know how big PIF is going to be built up."
It is widely accepted, based on domestic money supply, that Saudi Arabia would need around $300 billion to maintain the peg. SAMA was forced to reiterate its commitment to the peg in May after March's decline prompted some investors to bet against it.
Moreover, Saudi Arabia needs the money to keep its economy ticking.
Under de facto ruler Crown Prince Mohammed bin Salman, the kingdom is attempting to reshape its oil-dependent economy by boosting the private sector. But the government still depends heavily on crude sales to help finance its budget. It is expected to draw down from foreign reserves to fill a deficit expected at nearly 13% of output this year due to low oil prices and the coronavirus-induced slowdown. In a sign of its precarious financial position, the government tripled its value-added tax rate, eliminated allowances for state workers and cut spending on headline projects.
Prince Mohammed tasked PIF in 2015 with diversifying the country's economy by investing in companies and industries untethered to hydrocarbons.
The centerpiece of that plan -- selling 5% of state oil giant Aramco, known officially as Saudi Arabian Oil Co., on an international exchange -- was supposed to inject up to $100 billion into PIF's coffers for foreign acquisitions. After repeated delays, Aramco offered just 1.5% of its shares on the Riyadh bourse, generating about $30 billion.
"PIF couldn't do much with the proceeds of the Aramco share sale because the majority of this money came from the banking system inside Saudi Arabia," said Mazen al-Sudairi, head of research at Riyadh-based Al Rajhi Capital.
Another strategy to fund PIF's investments -- selling the fund's stake in national petrochemicals firm Sabic to Aramco for $69.1 billion -- also has fallen short as Aramco seeks to lower the valuation.
"The drop in foreign reserves was absorbable, and an injection from SAMA reserves was the fastest way to access cash," Mr. al-Sudairi added.
PIF in the first quarter bought roughly half-a-billion-dollar stakes in each of Facebook Inc., Walt Disney Co. and Marriott International Inc., according to a U.S. regulatory filing in May. It also acquired shares worth a similar amount in Cisco Systems Inc., Citigroup Inc., Bank of America Corp., Carnival Corp. and Live Nation Entertainment Inc. It bought a stake worth $714 million in Boeing Co.
Most other sovereign-wealth funds in the region were also seeded with foreign reserves, but relatively high oil prices over the years ensured a steady inflow of U.S. dollars for their state owners. PIF itself received about $27 billion worth of riyals from the central bank in 2016.
The concern with PIF's bold strategy -- piling into global stocks including in hard-hit industries like travel and entertainment, even as few other funds appear to be buying -- is that it risks gambling away what is increasingly a finite pool of capital at the kingdom's disposal.
"The optics appear unhelpful given the recent announcement for a substantial hike in VAT and ongoing fiscal austerity," said Tarek Fadlallah, Middle East chief executive at Nomura Asset Management.
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