Don’t Look At China, The Threat Might Come From Saudi Arabia

Source: Internations.org

You probably have heard this numerous times before; the Chinese position in US Treasuries is outright dangerous and China could single-handedly force the US Dollar to weaken quite substantially. Whilst that’s definitely correct, it sure looks like one is overlooking the impact the low oil price has on the public finances of Saudi Arabia.

As the country is mainly depending on exporting its oil to keep its government budget balances, the Kingdom has been hit extremely hard by the 60% drop in the oil price as an almost certain budget surplus was suddenly converted in a huge budget deficit. In fact even during the darkest hours of the Global Financial Crisis, not a lot of countries saw their government budgets dip into the red by in excess of 20%!

Source: The Guardian

The main problem is the fact Saudi Arabia had been using an assumed oil price of $100/barrel to balance its budget and as the current oil price is less than $50/barrel, a lot of government officials will be scratching their heads. A huge budget deficit also means the Saudi’s will be scrambling to get their hands on cash and earlier this year the country has completed the first debt offering in almost 10 years!

But that won’t really help much. Raising a few billion dollars in government debt won’ offset a lot of the expected $150B deficit and the officials in Riyadh will continue to target the country’s sovereign wealth fund (well, it’s not ‘officially’ a sovereign wealth fund, but just an investment division of the central bank) which is the third largest in the world and had in excess of $750B in assets before the oil price started to fall.

Source: tradingeconomics.com

The Saudi Arabian wealth fund was an excellent performer as it yielded an average 11% return over the past 10 years and this might be the country’s best bet to get out of the current oil crisis. But that’s also where the US Dollar comes into play.