Saudi Arabia takes billions from asset managers to shrink deficit

“None of this should come as much surprise”, given the current-account deficit and risk of capital flight, he said. “Growing demand for insurance in the near term, combined with regulatory encouragement of highly prudential “actuarial pricing” after the price war of 2012-2013, means that Saudi Arabia’s insurers are showing few signs of being affected by the fall in oil prices“.

Institutions benefited from years of rising assets under management from oil-rich Gulf States, but are now feeling the pinch after oil prices collapsed last year.

“It was our Black Monday”, said one fund manager, referring to the large number of assets withdrawn by Saudi Arabia last week.

“Fund managers we’ve spoken to estimate SAMA [the Saudi Arabian Monetary Authority] has pulled out between US$50 billion to US$70 billion from global asset managers over the past six months”, Insight Discovery chief executive officer Nigel Sillitoe said by telephone yesterday. In other words, Saudi Arabia has less money coming (from oil sales) but its spending needs remain the same.

“The big question is when will they come back, because managers have been really quite reliant on SAMA for business in recent years”, Sillitoe said.

Since the third quarter of 2014, Sama’s reserves held in foreign securities have declined by $71bn, accounting for nearly all of the $72.8bn reduction in overall overseas assets.

Fund managers with strong ties to Gulf sovereign wealth funds, such as BlackRock, Franklin Templeton and Legal & General, have received redemption notices, sources told CNBC. Saudi Arabia’s attempts to bolster its fiscal position contrast with smaller and less-populated nations in the Arabian peninsula such as Qatar. The worldwide Monetary Fund predicts the budget deficit will exceed 400 billion riyals ($106.6 billion) this year.

The massive withdrawals happened because Saudi Arabia is in need of cash to sustain its own domestic economy, cut its widening deficit, and fund an ongoing military campaign in Yemen.

Others argue that US Federal Reserve chair Janet Yellen and her fellow policymakers have unsettled investors with their endless – and very public – procrastination about whether or not to raise U.S. interest rates before the end of the year. The endgame is that Saudi is willing to undergo short-term financial pain in order to emerge with a greater controlling share of the entire world’s oil supply. Investors should consider a company’s entire financial and operational structure in making any investment decisions.