Saudi Net Foreign Assets At $600-Billion: Jadwa

A Jadwa Investment press statement notes that Saudi Arabia’s net foreign assets rose by a little more than $100-billion to reach $600-billion by the end of 2011, according to its estimate.

For the first time, data on the total foreign assets and liabilities of all componentsof the Saudi economy (government, companies and individuals) has been published. It showsthat their combined foreign assets grew rapidly in recent years to stand at $707 billion at the end of 2010. With Saudi entities and individuals owing $213 billion to foreigners,total net foreign assets stood at $494 billion at the end of 2010. We estimate that theKingdom’s net foreign assets rose to almost $600 billion at the end of 2011. This is very high and represents a core source of strength for the economy.

The data, known as the international investment position, gives a full picture of theKingdom’s financial position versus the rest of the world. Produced by SAMA, it shows thevalue and types of assets that are owned, and the liabilities owed, by all parts of theKingdom’s economy. Data on the position of the government and the banks are reported on amonthly basis by SAMA, but this is the first time that data has been issued which includesthe private sector.

The international investment position is an important indicator of the health of aneconomy in relation to its transactions with the rest of the world. In particular, itgives a guide to the ability to repay debts, absorb external shocks (such as a fall in theoil price) and support the exchange rate. For the Kingdom, the international investmentposition is an important strength. This is clear from a comparison with other countries.

At the end of 2010, the Kingdom’s net international investment position was equivalentto 110 percent of GDP. Of the 42 countries for which the international investmentpositions are published and easily accessible (primarily in Europe and Asia) only HongKong, Singapore, Taiwan and Switzerland had a higher net position. The US and Eurozoneboth had negative net international investment positions, and Greece, Spain, Ireland andPortugal were among the five countries with the largest shortfall in foreign assetscompared to foreign liabilities.

The four years of data that were released by SAMA (see table on page 3) show aconsistent improvement in the net international investment position, which climbed to $494billion at end-2010 from $375 billion at the end of 2007. This was driven by higher oilrevenues. For most of the period between 2007 and 2010, oil revenues were in excess ofgovernment spending, enabling a large build up of reserves in the form of foreignsecurities and bank deposits. No data is available on the makeup of the government’sholdings of foreign securities; we assume that the bulk is comprised of foreign governmentbonds.

In 2009, when the government drew down its reserves to finance spending during theglobal recession, the Kingdom’s total foreign assets still rose, owing to a jump ininvestment in foreign equities and bonds by the private sector and an increase in theprice of these assets over the year. Direct investment by Saudi companies abroad grew by56 percent over the three years to end-2010, but at $26.5 billion it was well belowinvestment by foreign companies into the Kingdom and accounted for only 3.8 percent oftotal foreign assets.

Liabilities grew at a faster pace than assets, rising by 84 percent between end-2007and end-2010. This is almost entirely the result of inflows of direct investment.Improvements in the business environment, greater foreign access to local opportunitiesand the relative attractiveness of the Kingdom compared to other investment destinationscaused the total value of foreign direct investment to surge by 132 percent over the threeyears to end-2010. Foreign portfolio investment was very low, both as a proportion oftotal liabilities (1.7 percent at end-2010) and compared to the size of the economy (0.8percent) reflecting the limited foreign access to the local stock market and small amountof debt issued.

We think the Kingdom’s international investment position improved further last year.Data published by SAMA shows that reserves rose by $96 billion in 2011, to $541 billion,and the net foreign assets of the banking sector increased by $9.3 billion. Over the firstthree quarters of 2011 holdings of foreign assets grew by a greater amount than foreignliabilities (net outflows of portfolio and other investment totaled $12 billion each,while net inflows of foreign direct investment were $10 billion). As a result, we assumethe Kingdom’s total foreign assets exceeded $800 billion at the end of last year and thenet international investment position was almost $600 billion.

A breakdown by the holder of assets and liabilities is not contained in the new data;however, it is possible to derive this from the data. Of the $707 billion of total foreignassets at the end of 2010, reserves totaled $445 billion, foreign assets of local bankswere $51 billion and independent government organizations’ (such as the pension funds)deposits with foreign banks and investment in foreign securities amounted to $79 billion.This leaves $132 billion, which we assume was the value of foreign assets held by theprivate sector (both businesses and individuals).

Of the liabilities that the Kingdom had to the rest of the world at end-2010, $25billion was accounted for by local banks and a further $3 billion by foreign institutions’deposits at SAMA. This leaves $185 billion, which we assume to be the amount the privatesector owes to the rest of the world. Although this figure is larger than private sectorforeign assets, it is primarily direct investment by foreigners, which has been beneficialto the Saudi economy. Furthermore, many independent estimates put the stock of foreignassets of the private sector at well above the level we derive from the new data;measuring these assets is very tricky and it is possible that the new data does notcapture everything.

Nonetheless, the publication of the international investment position is anotherexample of the improvement in data dissemination in the Kingdom, with April also seeingthe first release of detailed quarterly real GDP data. Bahrain is the only other countryin the region that publishes its international investment position. Greater availabilityof data helps investors in their assessment of the Saudi economy.

Saudi Arabia’s international investment position

($ billion)

2007 2008 2009 2010

Assets 490 622 635 707

Direct investment 17 20 23 27

Portfolio investment 106 97 131 156

Equity securities 56 55 77 101

Debt securities 50 43 54 55

Other investment 61 62 71 79

Loans 3 4 4 3

Currency and deposits 42 40 48 51

Other assets 17 18 20 24

Reserve assets 306 443 410 445

Currency and deposits 93 132 111 117

Securities 211 308 286 315

Other reserve assets 2 3 13 13

Liabilities 116 159 197 213

Direct investment 73 112 147 170

Portfolio investment 3 4 4

Equity securities 2 3 3

Debt securities 1 1 1

Other investment 42 44 46 39

Loans 13 14 13 13

Currency and deposits 28 28 25 25

Other liabilities 1 1 7 1

Net international

investment position 375 464 439 494