Fund Managers Have Their Own ‘Black Monday’ Thanks To The Saudis

The ongoing slump in oil prices is forcing Saudi Arabia to retrench and bring home tens of billions of dollars that it has overseas.

Bloomberg reports that Saudi Arabia has pulled out between $50 and $70 billion that it has invested around the world with asset managers. The withdrawal of funds occurred over the past six months. The staggering sum is a sign that the massive OPEC producer is scrambling for financial resources to plug its widening budget deficit, as well as cover the mounting costs for its military campaign in Yemen. Related: Iran Deal Opponents Try A New Approach

Saudi Arabia's sovereign wealth fund hit a peak of $737 billion in August 2014, but has fallen by at least 10 percent since then as oil prices have collapsed by more than half. As of July 2015, the fund's assets stood at $661 billion, as the country has been forced to tap foreign exchange for its large budgetary needs. Oil makes up 80 percent of Saudi budget revenues, but its budget deficit his ballooned to 20 percent of GDP.

Of course, with the third largest sovereign wealth fund in the world, Saudi Arabia can keep up this pace for a few years, if it really wants to. And by all accounts, the Saudi leadership is playing the long game. It is willing to put up with short-term pain if its strategy of pursuing market share works out over the longer-term. Saudi Arabia's economy is not diversified - it is entirely dependent on oil. Related: The Peak Oil Story We Have Been Told Is Wrong

So squeezing out higher-cost oil producers around the world, even if it means deficits for a few years and a drawdown in its foreign exchange, could work to the country's advantage over the coming years and decades as it claws back influence and market share. It is a risky bet, and it is not clear that it will work out - especially since U.S. shale could bounce back when oil prices rebound - but Saudi Arabia sees few alternatives.

For now, that means that Saudi Arabia will have to bring cash home, withdrawing billions of dollars' worth of assets from abroad. That could slam the asset managers that are managing Saudi money, with one manager calling it their "Black Monday," according to the Financial Times.

By Charles Kennedy of Oilprice.com

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