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Tue 4 Oct 2011 09:46 AM

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Saudi may tap reserves to fuel $130bn spending plan

OPEC kingpin may turn to reserves as oil prices drop below breakeven budget price

Saudi may tap reserves to fuel $130bn spending plan
Saudi Arabia depends on oil for 86% of its revenues

Saudi Arabia, the world’s largest oil exporter, may be
forced to tap its reserves to fund spending programs as oil prices drop below
the kingdom’s breakeven budget price.

King Abdullah this year announced a $130bn plan to create
jobs and build homes after uprisings toppled leaders in Tunisia, Egypt and
Libya. While officials haven’t said whether they’ll sell debt or draw on
reserves, as they did two years ago, an oil price below an $85 to $90 breakeven
level as estimated by Citigroup Inc may force them to act.

The central bank’s total assets fell 0.3 percent to SR1.93
trillion ($515bn) in August from July, according to data from the Saudi Arabian
Monetary Agency. It was the first monthly decline since February, when the
assets fell 0.4 percent. The Riyadh-based bank didn’t respond to telephone
calls and a fax seeking comment on the reason for the decrease.

“The only reasonable explanation is that they have drawn
down their assets to help fund government spending as happened earlier during
the financial crisis,” Jarmo Kotilaine, chief economist at Jeddah-based National
Commercial Bank, said in a phone interview.

“Lower oil prices don’t only explain the decline.”

Saudi Arabia, which depends on oil for 86 percent of its
revenue, tapped reserves in 2009 to maintain spending as the worst financial
crisis since the Great Depression pushed oil prices as low as $34 a barrel.
Then, the bank’s total assets dropped 8 percent to about SR1.6 trillion as the
kingdom deployed a five-year $400bn stimulus package.

Finance Minister Ibrahim al-Assaf said government revenue
will cover increases in spending this year, al-Eqtisadiah reported Oct 2. In
May, al-Assaf said the kingdom wouldn’t need to tap its reserves to finance
spending, including a five-year $384bn development plan, unless revenue slowed.

When al-Assaf made his comments five months ago, crude oil
was trading above $100. Prices have declined more than 30 percent from a high
this year of $113.93 a barrel in April and were trading below $78 a barrel in
New York.

“The reserves provide a buffer for the government to meet
its spending commitments in the event of a shortfall in revenues,” said Paul
Gamble, head of research at Riyadh-based Jadwa Investment Co. “There’s no
reason to get in debt if you have savings you can use. While they have such huge
savings, they will always prefer to draw these down than issue debt.”

The cost of insuring Saudi debt against default has dropped
12 basis points from a 19-month high of 143 reached in February, according to
data provider CMA.

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Credit-default swaps pay the buyer face value in exchange
for the underlying securities or the cash equivalent, should a borrower fail to
adhere to its debt agreements. A basis point equals $1,000 annually on a swap protecting
$10m of debt.

Even though Saudi Arabia has no international debt there is
trading of credit-default swaps linked to the kingdom as investors seek to
protect against the risk of political turmoil in the world’s biggest oil
supplier. Swaps are being used to speculate on contagion from upheavals in
neighbouring countries, as a proxy for government-controlled companies such as
petrochemical maker Saudi Basic Industries Corp. and to hedge debt the nation
may sell in the future.

The Saudi economy has benefited from government spending and
will grow 6.5 percent this year, compared with 4.1 percent in 2010, the
Washington-based International Monetary Fund said in a review of the Saudi
economy in August.

Saudi Arabia should “issue bonds even if they don’t have
immediate financing needs, particularly to build up a yield curve for local
corporates,” Gamble said.

The kingdom has just seven corporate bonds traded on the
stock exchange. Saudi Basic Industries, the largest petrochemical maker in the world,
and Saudi Electricity Co are among four companies with bonds listed on the
Saudi exchange. The nation’s first corporate bond issue took place in 2003.

Saudi Arabia is concerned that global economy “maybe
entering in a new downturn of fear and weakness, especially in the big
financial institutions in Europe,” central bank Governor Muhammad Al-Jasser was
cited on Sept. 28 as saying in the interview with Asharq al-Awsat.

Saudi Arabia is seeking safer foreign-asset classes in
response to the global economic uncertainty, said Turki Fadaak, head of
research at Riyadh-based Albilad Investment Co.

The central bank’s holdings of foreign securities gained 0.8
percent to a record SR1.36 trillion in August from July, central bank data
show. SAMA’s foreign currencies and gold assets increased 6.1 percent to SR169.3bn
in August from July, according to central bank data.

Saudi Arabia may report a fiscal surplus of 1 percent of its
gross domestic product this year on stable non-oil revenue as expenditure grows
by 40 percent, Citigroup Inc analyst Farouk Soussa said in a note to clients on
Sept 29.

“We remain confident that Saudi Arabia has the fiscal space
to absorb these deficit either through resorting to its considerable fiscal
assets or through borrowing,” Soussa said.

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