Saudi using $400bn cash reserves to keep up growth

Saudi Arabia is pumping money from its huge $400 billion (Dh1.46 trillion) stockpile of reserves into the economy to keep up growth, economists and bankers in Riyadh said.

A decline in net reserves over the last three months suggests that the world's biggest oil exporter is using the money to keep up liquidity in Saudi banks and possibly shore up government investment spending too, they said.

The result should be slightly positive growth in gross domestic product even as most major global economies and some of Saudi Arabia's Gulf neighbours endure contractions.

SABB bank, the Saudi affiliate of British banking giant HSBC, has forecast 0.7 per cent growth this year down from 4.2 per cent in 2008, while investment bank Jadwa has predicted 0.2 per cent.

"The economy is still vibrant," John Sfakianakis, economist at SABB, said. "I don't think they have any systemic risks." The Saudi Arabian Monetary Agency released data on Saturday showing a nearly two per cent decline in reserves in February to 1.585trn riyals (Dh1.54trn) from January.

"The domestic economy here is pretty healthy despite a fall in oil export earnings," added Jadwa's Paul Gamble.

Reserves peaked at $443.2bn last November following a year of skyrocketing oil prices, which peaked at $147 in July.

Sfakianakis said the government is injecting more funds into the banking sector to stimulate lending, which slowed late last year as Saudi banks began to feel the impact of the global financial crisis.

But the government could also be using the reserves to fund its budget because of a slowdown in oil receipts due to lower crude prices over the past four months, according to Gamble.

"I assume the oil revenues are less than the government is spending," he said.

Government spending on major infrastructure, education and health sector projects – projected at some $400bn over the next five years – is crucial in driving the economy.

Private investment flows from abroad have slowed and domestic consumers have pared back their shopping, made nervous by the global downturn. "Consumers have taken a big hit from the fall in the [Saudi] stock market," said Gamble.

However, economists say if the current oil price and production levels can be sustained, the Saudi government should be able to pass the year without tapping significantly into its reserves. There is little likelihood of any fiscal stress at any rate.