Billionaire Saudi prince sees currency de-peg as ‘last resort’
SAUDI billionaire Prince Alwaleed Bin Talal raised the possibility that the kingdom may need to depeg its currency in the future as the country undergoes unprecedented social, political and financial change.
“As a last resort maybe sometimes two, three years down the line it’s a possibility,” Alwaleed, speaking in an interview with Bloomberg TV, said of a potential change to the riyal’s fixed valuation against the dollar. “Meanwhile it should stay where it is right now. There are so many things happening.”
Saudi officials have repeatedly sought to refute speculation on maintaining the currency’s peg to the dollar as the country battles slowing growth and slumping oil income. Central Bank Governor Ahmed Alkholifey earlier this week again reiterated the commitment to maintaining the peg.
The world’s biggest oil exporter halted payments to contractors last year as it sought to rein in a budget deficit that reached about 15 per cent of gross domestic product. Authorities also have introduced a package of austerity measures, including cuts to public- sector wages and energy subsidies.
Economic growth is expected to slow to 1.3 per cent this year, according to a Bloomberg survey of economists, the lowest level since the 2009 global recession.
The currency has been fixed at about the same rate since the 1980s. Since its introduction, the riyal’s 3.75-per dollar peg has been instrumental in shielding the economy from the volatility of oil and natural gas.
Saudi Arabia is working to reduce the the Middle East’s biggest economy’s reliance on oil, which provides threequarters of government revenue, as part of a plan for the biggest economic shakeup since the country’s founding.
As the government seeks to navigate the worst economic slowdown since the global financial crisis, speculation has mounted this year that the world’s biggest oil exporter won’t be able to maintain the riyal’s peg to the dollar as revenue plunges.
Hedge funds such as PointState Capital and Pershing Square Capital Management have wagered that the fixed rate will be dropped.
“It’s the first time any policy maker in the kingdom has even raised the prospect of depegging, and that’s significant,”
It’s the first time any policy maker in the kingdom has even raised the prospect of de-pegging, and that’s significant. Neil Shearing, chief emerging markets economist at Capital Economics Ltd. in New York
according to Neil Shearing, chief emerging markets economist at Capital Economics Ltd. in New York.
“But the message for the next year or so is still steady as she goes – signs point to keeping the peg in place.”
A fixed exchange rate helps the central bank accumulate foreign reserves when oil prices rise and avoid squandering the windfalls that anchor investor confidence during economic downturns. It also helps cap long-term inflation by effectively linking monetary policy to that of the US. —WPBloomberg