Bank of America – New Saudi central bank chief may face monetary strains in investment push

DU(BA)I (Reuters) – The new governor of the Saudi Central Bank faces the delicate task of balancing the need to preserve monetary reserves amid steep fiscal targets with potential support for Crown Prince Mohammed bin Salman’s ambitious investment plans, analysts said.

Fahad al-Mubarak, appointed in a royal decree on Sunday for a second stint in the role, takes the helm as the world’s top oil exporter moves to recover from a sharp economic contraction last year caused by low crude prices and the COVID-19 pandemic.

Saudi Arabia, which posted a fiscal deficit of 12% of GDP last year, plans to nearly balance its budget by 2023 while pushing through economic diversification plans that are largely being supported by its sovereign wealth fund, Public Investment Fund (PIF).

“I think there will be more pressure on the monetary side to help revive economic activity and a greater focus on supporting the Public Investment Fund’s growth objectives, including on the funding side,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank.

The Gulf state has been financing its budget through debt issues and withdrawals of government reserves at the central bank, which last year also pumped $40 billion of foreign reserves into PIF to help fund investments.

SAMA, as the central bank is known, has around $450 billion in foreign reserves.

FINANCIAL CUSHION

Economists say the vast financial cushion may be further used to back PIF, particularly after a new law last year widened the scope of the central bank to include economic growth support – in addition to maintaining monetary and financial stability.

PIF, with assets of 1.5 trillion riyals ($400 billion), plans to invest 3 trillion riyals in new sectors over the next 10 years and inject at least 150 billion riyals annually in the local economy until 2025, Prince Mohammed said on Sunday.

“There is a financing gap in the PIF plans, and I think this gap will have to be filled with a combination of things, including potential capital injections from SAMA,” said Jean-Michel Saliba, MENA economist at Bank of America.

Transfers to the PIF do not represent a reduction in the government’s total wealth, but they cut liquid assets that the central bank has available to defend the riyal, if needed.

Last year’s injection to the PIF, which Saudi Finance Minister Mohammed al-Jadaan at the time said was done on an “exceptional basis”, had contributed to a sharp drop in reserves during a time of economic uncertainty, pressuring the currency.

Governor Mubarak, who had led SAMA from 2011 to 2016, was previously chairman and managing director of Morgan Stanley, Saudi Arabia, and has also served as chairman of the Saudi stock exchange.

Economists say his investment banking experience could come in handy as Saudi Arabia seeks to attract investment in major projects. ($1 = 3.7511 riyals)