A significant amount of news was created last month by the release of disaggregated Treasury holdings for the Middle East and especially for Saudi Arabia. The recently returned ‘Don of Capital Flow Analysis’, Brad Setser, had some good posts on what new information is contained in the release and equally important, pointing out the considerable amount of grey area that still exists (here and here).
What follows, without too many repetitions from the links above, are some supplementary notes, mostly on equities and the currency breakdown & location of the sizeable cash holdings of the Saudi Arabian Monetary Agency (SAMA).
Equities & Agencies
The release of the ‘Annual Cross-U.S. Border Portfolio Holdings ‘ by the Treasury last week went almost unnoticed even though it contained the second half of disaggregated data from BBG’s FOIA request. Again, as with the initial Treasury Holdings release around mid-month, there wasn’t too much to be learned from the total holdings, if only because the data is almost a year old by now.
[click to enlarge]
In addition to the ~$100 bn Treasuries held directly, Saudi Arabia’s direct equity holdings in June 2015 amounted to $52 bn, long-term Corporate and Agency bonds to another $ 20 bn .
The annual positions going back to 1994, with >1 year time intervals in the early years, were also provided. Two interesting points:
1. As Agency spreads, along with everything else less liquid than Treasuries, widened during the crisis, Saudi entities shifted a non-negligible part of their reserves into Agencies, collecting the wider spreads.
Even though S.A.’s private sector held ~$45 bn of debt securities globally in 2008, Agencies are typically more frequently used by Central Banks (CBs) in search of Treasury substitutes. Moreover the rapid rise and decline is rather indicative of a top-down decision by one institution than many private sector investors deciding in the turmoil of 2008 to acquire Agencies. Consequently, the spike is likely attributable to SAMA.
2. S.A. has probably been selling US equities even before the peak value in mid-2014. The blue line in the chart below shows the equity holdings taken from the newly released annual dataset. Since Saudi entities most likely hold a broad range of companies from various sectors to minimize idiosyncratic risk, it seems reasonable to divide the period-to-period changes into valuation gains/losses and the actual underlying flows.
The red line shows the expected value of the portfolio by taking the previous value of [a] and multiplying it by the realized performance of the S&P 500. The cyan bars display the implied flow into and out of US equites by S.A. .
From 2002 – 2012, S.A. constantly added to their holdings. Importantly, even during the GFC, there was no selling. Unfortunately, quantifying the amounts held by SAMA and the private sector respectively, is difficult. Although it is conceivable to attribute the total holdings to SAMA, the Saudi Arabian private sector has accumulated a $100 bn position in global equites. Thus, it seems likely that the reported $52 bn are owned by a mix of private and official accounts. Despite the unknown split, it seems unlikely that SAMA sold much of their direct equity holdings in the US during the last time of low(er) oil prices during 2008.
Taken together with the move into the slightly less liquid Agencies, SAMA’s behavior appears to have been neutral with some hints of liquidity provision as asset prices fell, thereby dampening the decline in risk assets during the GFC. Their role at the moment is rather different.
Saudi Arabia’s high allocation towards currency and deposits is relatively uncommon and not seen in comparable countries. Unfortunately SAMA does not provide a breakdown by currency. The consensus, as pointed out in one of the links above, is that most of these deposits are kept in US dollars as SAR is ultimately pegged to the USD.
While that makes intuitive sense, it is also conceivable for the Euro allocation to be sizeable, as AAA sovereign short term rates are quite negative, hoovering a bit below the deposit facility rate of -0.4%. There may be single cases where banks have passed on negative rates to their customers; broad data from the ECB however shows that while front-book deposit rates are approaching 0, they are not yet negative, incentivizing switching from Schatz/Bobl & Co to deposits.
Fortunately, banking is a heavily regulated industry where a lot of activity is being tracked and oftentimes released to the public by the regulators and/or CBs. This factor opens up some indirect ways around SAMA’s nondisclosure.
As always, to every asset (cash held by S.A.) there exists a balancing liability, in this case on global banks’ balance sheets. The BIS publishes, in their Locational Banking Statistics (LBS), a currency breakdown for the total liabilities on banks’ balance sheets for 220 countries and a few regional aggregates. The currency breakdown provided by LBS is based on the residence principle, i.e. it’s not possible to track SAMA’s position exclusively, but only that of all Saudi entities; official (SAMA) + private (NFCs + HHs + banks (ex-SAMA)).
As an initial check whether it’s sensible to proceed, due to potential data issues caused by fallacious nationality assignments, the asset and liability positions, equivalent in a perfect world, are compared. This is done by summing up the cash position SAMA provides in their monthly reserve release and the foreign currency (FC) held by the private sector reported in S.A.’s IIP and charting it against the total liabilities reported by banks around the globe for which the nationality of the holder has been identified as Saudi Arabian.
The lines are fairly comparable, both level- & delta-wise; it appears safe to proceed. Stepping back for moment, it is quite an achievement by the data collection departments of central banks contributing to the LBS, to be able to assign the nationality of the deposit holders in their respective location to this extent so that textbook logic (assets = liabilities) can, to a large degree, be replicated in practice.
As mentioned previously, the BIS doesn’t release a currency breakdown by subcategory (banks; central banks; non-banks) but only for the composite (blue line above). It is therefore necessary to ensure that SAMA is responsible for a major part of the total holdings and not overshadowed by the private sector. If for instance, SAMA accounted for only say 10% of cash holdings, it could be possible for their currency breakdown to differ quite strongly from the aggregate, without affecting the composite breakdown too much.
At the close of Q3 2015, SAMA’s contribution to the total cash held by Saudi Arabian entities in banks abroad was 67%; enough to draw conclusions from the composite currency breakdown.
With these formalities taken care of, finally, the LBS data for Saudi Arabia:
The US dollar share of total Saudi Arabian deposits in global banks, taking into account the ‘unallocated category’, is 85% [182/(221-8)]. Euros and Pounds account for 6% and 5% respectively.
Conclusion: The consensus is correct, SAMA’s deposits are almost solely kept in US dollars.
Now, that the currency breakdown has been established, the real fun begins: locating where SAMA keeps the deposits. While all US dollars are eventually borrowed back into US territory even when they are not required to fund banks’ assets, in which case they end up at the Fed to earn IOER, there is no reason to believe SAMA keeps all their deposits directly in US banks. In fact, any bank above the mere local level will generally accept foreign currency deposits and will act as middleman, on-lending the funds back to the US. As will be seen shortly, SAMA is a heavy user of Eurodollar deposits.
The statistics sections of the major CBs offer some insight with regard to the location of SAMA’s cash deposits. Some CBs publish their ‘local’ LBS results, which are later summarized by the BIS; some publish numbers on the external business of banks operating in their territory more generally and some decide to report nothing, at least not on their international websites.
In order to obtain a quantitative result, a few assumptions are necessary. No CB issues numbers by specific institution, so SAMA’s position has to be abstracted from the overall cash holdings of Saudi Arabian entities. As established above, SAMA accounts for two-thirds of the overall Saudi deposit base abroad.
In many cases, S.A. isn’t broken out separately but reported in a Middle East aggregate. As not every CB releases the country breakdown of this category, the countries in the ‘Asian Oil Exporter’ category used by the US Treasury will serve as guideline. Some CBs also add Africa to the Middle East category. To extract the amount of deposits belonging to Saudi Arabian entities from regional composites, the LBS reported Saudi numbers are compared to the regional LBS aggregates (Middle East or Middle East + Africa), resulting in shares of 45% and 34% respectively.
For instance, the BoE provides a number for S.A. itself, i.e. the (x) column remains blank and (y) is in this case not the result of a calculation, but a directly imported value. 97.2 is then multiplied by (a), to obtain the implied SAMA deposit holdings in the UK of $64.15 bn.
Jersey on the other hand reports only a Middle East aggregate, which is entered into column (x). (y) is calculated by multiplying 28.73 by (b). From then on, the same procedure as in the UK example.
What can be learned from these back-of-the-envelope calculations?
- The UK is by far the most important location for Saudi deposits;
- Deposits kept in the US are relatively modest;
- Offshore/Tax-havens account for ~20% of the identified $136 bn ;
- The sum explains two-thirds of SAMA’s ~ $200 bn cash holdings.
Where are the other $65 bn? Partly in the countries not in the table above, either because they don’t report their contribution to LBS on their website or don’t take part in LBS at all. Luxembourg, Belgium, Ireland, Hong Kong and China are some of the more promising names. Another possibility, with a similar effect as holding securities in custodian banks in other countries, is the acquisition of MMFs outside the US. Finally, data issues (missing nationality data; depositing cash via firms with a different nationality…) can likely be blamed for some billions as well.
What did S.A. sell & the way ahead
What is (sort of) known:
- Direct treasury holdings have not declined since reserves peaked (see Brad’s blog for charts)
- Treasury holdings in custodial centers haven’t declined either
- The deposit portion of reserves is also flat from mid-2014 – now, but initially declined by $20 bn from mid 2014 – mid 2015
- S.A. (official+private) sold US equities worth $30 bn from mid-2014- mid 2015
Points 1-3 are fairly straightforward: SAMA probably didn’t sell much of their safest, most money-like securities.
With regard to equites, it seems reasonable to assume that the selling reported in the Annual TIC data was mostly from the official side for two reasons:
- The global equity holdings of the S.A. private sector didn’t decline during the same time frame.
- The incentives for the private sector to sell foreign equities are not really in place at present. If the general expectation of a depreciating local currency is correct, it makes no sense to switch back from a supposedly stronger US currency denominated asset to a weaker SAR based one. At some point, it’s possible that repatriation flows will set in, but with a top heavy wealth distribution and no deep recession despite the oil decline, this is rather unlikely for now.
By separating the decline into two phases, from mid-2014 to mid-2015 and from mid-15 to now, and some assumptions about equity holdings outside the US, a still murky but somewhat clearer picture can be painted.
As pointed out at the beginning of this post, it’s difficult to figure out the share of SAMA’s holdings in TIC data. But even without this knowledge, some relative estimates about the allocation to equities outside the US can be made.
The US share in MSCI World is typically somewhere between 50-60%. If SAMA regards this as a guideline, the unknown US allocation times ~[1/0.55] should reflect their total equity holdings.
It’s contestable if SAMA holds a lot of EM equities, as the EM risk vector is somewhat common to both the health of the Saudi Arabian economy and EM equites, and could introduce unwanted wrong-way risk. If that’s the case, the 50-60% share of US equities assumed above, could be higher. On the other hand if SAMA’S regional equity split resembles that of SWFs from the region, it seems likely that 50-60% is an overstatement, as SWFs appear more tilted towards Europe & UK vs the US.
Unable to get a better grip on the real number, let’s call it a wash and stay with the initial midpoint of 55%.
Based on the assumption that all selling from mid-2014 to mid-2015 came from the official side and the selling was conducted without altering the regional percentage allocations, the selling in total amounts to $55 bn [30 bn (US equities) * 1/0.55].
In addition, during the same time cash holdings declined by $20 bn, putting the total implied reserve drawdown at 75bn US. The actual reserve decline during this period at $67 bn isn’t that different, so with the risk of still not knowing the detailed allocation of a substantial part of the reserve portfolio, the guesswork seems fairly good.
The second time period, from mid-2015 – now is trickier as the information about equity holdings, used in the prior period, is not available yet. Nevertheless it appears as if SAMA further derisked the portfolio as points [1-3] from above still hold. Flat direct positions in Treasuries + in custodial centers + an increase in the cash position back to mid-2014 levels despite an overall decline in reserves points to further selling of the riskier assets still left in the portfolio.
With this much selling likely to have already occurred, further equity selling by SAMA is a risk that shouldn’t plague investors too much going forward simply due to the fact that there is likely not much left to be sold and it’s kind of unlikely for the net position to go negative.
SWFs in neighboring countries, with typically much higher equity allocations, appear more likely of hitting the bid should oil prices turn down again. At this time, should further pressure arise, SAMA could meet these for some time without selling assets by simply running down the – until now – untouched cash holdings. If instead, SAMA begins to sell fixed income securities despite the large cash position, this would be rather indicative of how they view the direction of interest rates going forward than them being forced by the market to liquidate assets.