Saudi Arabia’s growing US debt signals easing fiscal pressures

While major holders of US debt like China and Japan are reducing their holdings of US debt, Saudi Arabia has increased its own position for the fourth month in a row, a move that could signal an improvement in the kingdom’s fortunes, according to analysts.

The oil-rich country’s holdings of US debt stood at $112.3 billion at the end of January, adding $9 billion from December 2016— the highest monthly increase in five months, data released by the US Treasury showed.

This marks a change from the kingdom being a net seller of US debt in first eight month of 2016, selling about $ 30 billion, according to data.

“More than anything, I suspect that this reflects the improvement in the balance of payments position over the past year,” Jason Tuvey, a senior economist in the London-based Capital Economics told Argaam.

Fiscal policy has dampened import demand and export receipts have risen on the back of higher oil prices, helping to narrow the current account deficit. At the same time, capital outflows have slowed, he said.

“The upshot is that the depletion of the Kingdom’s FX reserves has slowed and the authorities may have decided to shift some of their asset holdings into US Treasuries,” Tuvey said.

At the end of January, Saudi foreign exchange reserves fell to $514 billion from $524 the previous month, official data from Saudi Arabian Monetary Authority showed.  

In addition, for global asset allocators, the US treasury paper has always been the ultimate safe-haven investment.

“We are not surprised to see part of Saudi money flowing again into US Treasuries, still by far the world's most liquid market, an integral part of a globally diversified portfolio, and potentially considered as more interesting after the recent rise of the level and steepness of US Treasury rates,” Michael Bolliger, chief investment officer, at UBS Wealth Management told Argaam.

Yields are also competitive when compared to other assets, he said. The yield on the benchmark 10-year Treasury note came in 2.384 percent late Monday.

When oil prices were testing levels of $30 per barrel two years ago, the kingdom was forced to draw from its global assets to plug a growing budget deficit. Now, with the recent uptrend in the oil prices, fiscal strains have begun easing.

“The rise in energy prices has surely also eased pressure on the fiscal side, but we always thought this is an element that would only start to become binding in the long term, given low levels of debt and ample FX reserves,” he said.

Write to Elsayed Solyman at elsayed.solyman@argaam.com