As the Saudi riyal sinks, will it depeg from the dollar?

Published January 13th, 2016 - 11:32 GMT

The Saudi riyal hit a record low in forwards market yesterday as a slip in oil prices raised concerns that the kingdom would unpeg or loosen its currency from the US dollar.

One-year dollar/riyal forwards climbed as high as 1020 points, according to Reuters. This beat a previous 850-point record of set during speculation against the riyal in 1999.

On Monday, Saudi Arabia’s central bank governor Fahah Al Mubarak said that recent volatility in the forwards market was based on unrealistic expectations and maintained that government policy was committed to the dollar peg.

"Forwards are moving higher on speculation that Saudi Arabia may soon have to either abandon, or at the very least loosen its currency's peg to the dollar, as its reserves will dramatically fall if oil prices continue to slide further," a currency trader at a major Gulf bank told Reuters.

Low oil prices have raised concerns that Saudi Arabia, which is still 80 per cent dependent on oil for government revenues, will burn through its foreign assets much faster than in 2015. Last year the world’s largest oil exporter used $100bn of assets to plug its budget deficit. The deficit this year is forecast at SAR 326bn with Saudi’s foreign assets standing at $628bn in December.

However, a riyal depeg from the dollar is still believed unlikely by bankers.

Bank of America Merrill Lynch economist Jean-Michel Saliba said in a note to clients that Gulf USD pegs were likely to hold at current oil prices. This was due to sizeable foreign assets and changes in fiscal policy, he said.

Of the Gulf countries he believed Oman was most vulnerable.

Others have drawn confidence in Saudi Arabia’s plans to reduce subsidies and privatise state-owned assets announced at the end of December.

By Robert Anderson

 


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