Saudi Investment Fireworks

In my most recent blog entry I focused on the pressure being exerted on the Kingdom of Saudi Arabia by credit default swap (CDS) investors.  No surprise that the Saudi CDS rates continue to rise, as the probability of Saudi Arabia not meeting sovereign debt obligations continues to rise.

As the screws turn tighter on Saudi leaders to come up with solutions in the midst of soft petroleum markets, the Kingdom is tapping into old fashioned Western style financial instruments and manipulative strategies to help maximize Saudi crude assets.

In the past Saudi Arabia was able and was comfortable controlling crude market pricing by either increasing or decreasing production.  The US shale producers are making that simple tool much more difficult to administer as futures markets over react driving price points well beyond Saudi targets.

Meanwhile civilian strife or potential thereof is adding flames to the budget heat.

As reported by CNBC reporter, David Johnson:

"Saudi Arabia is somewhere in between: a stable nation with a sizable backup of reserve assets, somewhere around $624 billion as of December.  But much of that stability is bought with government jobs and generous public spending and with falling oil prices, the country has had to dip into its reserve assets to make up the difference.

Of course, the analysis depends on no major economic changes or events affecting Saudi Arabia. It also assumes oil prices remain low, which experts consider likely for the time being.

Looking at the country's finances in August, when oil swung between $48 and $41 a barrel. It had fallen a long way from its highs of $65 a barrel a few months before, but our lower estimate for its direction was way off. At the time, CNBC estimated the Saudis would be broke in August 2018, yet that was based on oil at $40 a barrel and before the Saudis cut public spending. 

The 2016 Saudi budget includes a spending cut of 13.8 percent from 2015 levels, though projections from Barclays puts that cut closer to 5 percent. Even so, the country is expected to reach a budget deficit of 12.9 percent of GDP in 2016, according to the investment bank."

That’s why the Kingdom may be considering to use an unconventional weapon in the oil war, which is to break the riyal ‘s peg against the US dollar. In other words, let the riyal fall.
That will make Saudi oil less expensive in global markets, help the country regain its market share in the US, and finish up the war against American frackers.

A weaker riyal will further help Saudi Arabia execute on its new strategy of producing and exporting refined products.
The problem is that this weapon may backfire and hurt Saudi Arabia’s economy. The prospect of a lower riyal, for instance, could cause a capital flight. And it could fuel inflation soon after it takes place, widening the Kingdom’s social budget deficit.

Saudi Arabia will be pulling out all the stops with its newly announced emphasis on sovereign equity fund investments, going public with a 5% equity of Saudi Aramco and currency manipulation tactics. 

Risky stuff.   Keep on your toes as the Saudi financial fireworks begin lighting up the volatile energy markets.