By Rupert Hargreaves 

Saudi Arabia’s FX reserves dropped for the 13th consecutive month during February as below oil prices continue to weigh on the Kingdom’s finances. That’s according to a flash research note on the Kingdom’s financial position from HSBC.

The country’s FX reserves stood at $593 billion in February, a month-on-month drop of $9.4 billion. While this decline was modest, it takes the total outflow of central bank foreign assets since oil prices began to decline in late 2014, to $150 billion. Saudi Arabia’s foreign reserves now sit at their lowest level since mid-2012.

The decline comprised of a $4.6 billion drop in the Kingdom’s Central Bank’s deposits held abroad and a $2.8 billion drop in investment securities. Even the typically stable SDR holdings and reserve position with the IMF declined by $2 billion.

The country’s money supply (M2 and M3) also contracted for the third consecutive month during February. This contraction occurred despite the fact that the central bank continues to follow expansionary monetary policy by returning the equivalent of $8.4 billion of sterilised liquidity into the banking system.

Saudi Arabia: Crisis budget 

Declining foreign currency reserves are just one of the many problems facing Saudi Arabia in the sub $50/bbl oil world. When the Kingdom unveiled its long-awaited 2016 budget at the end of December, the Saudi government forecast a deficit of 367 billion Saudi riyals (SAR) for 2015 (down from a surplus of SAR 161 billion reported for 2014) with projected revenue of SAR 608 billion (down from SAR 1.51 trillion for 2014) and expenditure of SAR 975 billion.

For full-year 2016, the government is forecasting a deficit of SAR 326.2 billion with projected revenue of SAR 513.8 billion and expenditure of SAR 840 billion. A deficit of c. 326.2 billion would be 13.5% of GDP, lower than the 19.5% deficit forecast by the IMF.

The budget also unveiled hefty cuts to public sector services including a reduction in education and health spending (set to fall 21% year-on-year), infrastructure and transportation (62% YoY) and spending allocated to municipality services (47%). Subsidy cuts mean that gasoline prices have now returned to 2006’s levels with the 91 and 95 octanes raised by 30 Halalas to SAR0.75/L ($0.20 litre, or $0.91 per gallon) and SAR0.90/L ($0.24), respectively. Other fuels that have been heavily subsidized have also been raised such as gas, diesel, and kerosene.