Last week, we showed how long Saudi Arabia’s stash of USD reserves will last under $30, $40, and $50 crude.
As we’ve detailed exhaustively, the country is staring down a current account-fiscal account outcome that makes Brazil look favorable by comparison. The fiscal budget deficit is projected at some 20% of GDP and two proxy wars combined with the necessity of maintaining the status quo for ordinary Saudis mean fiscal retrenchment is a tall order – even with the help of “advisers.”
Meanwhile, Saudi stocks just fell 17% in a month.
So how high, you might ask, do oil prices need to climb in order for Saudi to plug the gap? Here’s Deutsche Bank with the answer.
As you can see, there’s a long, long way to go, and between the pain from lower crude and from maintaining the riyal peg (which we’ve discussed at length), expect the petrodollar reserve bleed to continue. Here’s some color from DB:
The impact of oil prices on global central bank reserves is even greater than estimated by our model, due to the omission of Middle Eastern SWF holdings. In practice, low oil prices trigger reserve depletion through two channels. First, reserves are used to plug fiscal deficits. The Saudi government deficit, for instance, is to reach 20% of GDP this year. Second, a number of the largest oil exporters in the Middle East, notably Saudi Arabia and the UAE, maintain dollar pegs that come under pressure with low oil export revenues, which are also unhelpfully correlated with a stronger broad dollar.
We expect Middle Eastern governments to continue to lose significant reserves in the coming months. Low oil prices are only one ingredient in the mix. The exacerbating factor is our economists’ prediction that the main dollar pegs in Saudi and the UAE will hold, albeit at