Hedge Fund Shorts Saudi Riyal
In 2014, Zach Schreiber, owner of the Point State Capital hedge fund, made a famous short against oil, which was trading at record high prices then, at the Ira Sohn conference. That short turned out to be a prescient one and netted Schreiber and his investors billions of dollars in profits. He returned to the same conference yesterday to announce another short. This one is against the Saudi Riyal.
Schreiber outlined a number of reasons for his short thesis.
For one, the Saudi Riyal’s 3.75 to 1 peg with the dollar is unsustainable. The kingdom is using its foreign exchange reserves to maintain that peg in the face of dwindling oil revenues due to a precipitous decline in prices. Last year alone, its foreign exchange reserves declined by approximately $109 billion to $623 billion. Earlier this year, Saudi Arabia insisted that it would adhere to the peg even as currencies for other oil economies have sharply depreciated against the greenback.
For example, the Norwegian krone and Russian ruble lost 15.3% and 17.8% against the dollar in 2015. But the Saudi riyal held steady and even appreciated in value earlier this year against the dollar.
Saudi Arabia’s situation is further exacerbated by a number of geopolitical and demographic problems. The rise of ISIS to the north and Yemen’s Houthi rebels to the South has drawn the country into wars and increased its military spending. According to the Brookings Institution, Saudi Arabia’s defense budget has risen by an average of 19% each year since 2011. Already the country surpassed Russia to become the world’s third largest defense spender last year.
It’s spending on social security and subsidies is also an expensive proposition. Last December, Saudi Arabia announced a budget deficit of $98 billion and estimated that annual subsidies on oil, electricity, and water for its citizens cost the country upwards of $70 billion. Unemployment rates for citizens under 30, who comprise a majority of its citizens, is 30%. Saudi Arabia will need to increase education and social welfare spending in the coming years to ensure that their productivity is not wasted.
According to Schreiber, Saudi Arabia would become “structurally insolvent” to the tune of $5 trillion in “two to three years.” The Aramco IPO, which is expected to raise $100 billion, will also not make much difference to the country’s financial situation, he said, adding that“there was no practical way” to manage its balance of payments deficit (the country has $2 trillion in assets and $7 trillion in liabilities). “Saudi is mortgaging its future,” he said.
