Saudi Arabia’s Exact Holdings Of U.S. Debt Has Become A Hot Topic

A vast secret of the U.S Treasury market is how much debt is owned by Saudi Arabia. According to Bloomberg, that question — unanswered since the 1970s, under an unusual blackout by the U.S. Treasury Department — has come to the fore as Saudi Arabia is pressured by plunging oil prices and costly wars in the Middle East.

Last year, Saudi Arabia burned foreign exchange reserves of about $100 billion to fill its budget shortfall. It now even considers to sell a piece of the state owned oil company Saudi Aramco.

According to Bloomberg, “a big risk is that the kingdom is selling some of its Treasury holdings, believed to be among the largest in the world, to raise needed dollars. Or could it be buying, looking for a port in the latest financial storm?”

The Treasury has never disclosed the holdings of Saudi Arabia, as it groups it with 14 other mostly OPEC nations including Kuwait, the United Arab Emirates and Nigeria. For more than a hundred other countries, from China to the Vatican, the Treasury provides a detailed breakdown of how much U.S. debt each holds.

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The special arrangement of the 1973 oil shock with the Arab embargo is a small concession among many successive U.S. administrations that has created the America’s strategic relationship with the Saudi royal family and to access the deep oil reserves of the kingdom.

As Saudi Arabia’s holdings are believed to be the largest, Saudi Arabia’s moves have lead to scrutiny. Figures by the Saudi Arabian Monetary Agency (SAMA) reveal that reserve assets have fallen by $108 billion in 2015.

The Treasury has to abide by political sensitivities, while the market craves for more transparency, it is an understandable conflict.

And events recently, from President Barack Obama’s nuclear deal with Iran to Saudi Arabia’s execution highlight how sensitive U.S.-Saudi relations have become. The rationale for the longstanding alliance has been weakened by America’s domestic oil boom, and this has made it less dependent on Saudi exports.

Regardless of the political considerations, Saudi Arabia may hold onto its Treasuries as a strategy to bulk on dollar assets amid the turmoil in global financial markets. For an oil producer dollars is a must, the balance sheet should show dollars, said Deutsche Bank’s director, Sebastien Galy, who suggests SAMA may be liquidating investments that are riskier such as real estate, stocks and private equity to build up cash. Holding dollars makes real sense against the dipping oil price.

Data from SAMA and US Treasury reveals figures from SAMA show reallocation of some of its reserves into short-term, liquid assets such that the finance ministry meets the budget commitments and defends its 30-year-old currency peg of 3.75 riyals to the dollar.

“When SAMA has to raise liquidity for the Ministry of Finance, the deposits and cash go up and they’d liquidate other assets,” said SAMA’s former head of investment. So they are preparing a certain amount of cash available.”

SAMA isn’t a typical central bank because it acts as a quasi-sovereign wealth fund, he said. As such, it aims for higher returns as a buffer against falling oil revenue and invests in an array of risky assets, which explains why it has only recently started to become more transparent, Alsweilem said.

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