Saudi dollar currency peg likely to be followed by neighbours
RIYADH: Saudi Arabia's pledge to maintain its dollar currency peg, amid oil's slump to a six-year low, is likely to be followed by its Gulf neighbours.
Ahmad Al Kholifey, the Saudi central bank's deputy governor for research and international affairs, told Al Arabiya television Tuesday that authorities will maintain the peg at 3.75 riyals per dollar. One-year forward contracts for the riyal, which have surged this month on speculation it may be devalued, fell after his remarks. Investors have increased bets that the six Gulf Cooperation Council countries will be next to abandon their pegs after China devalued the yuan and Kazakhstan allowed its currency to float. The trade's premise? The dollar is appreciating, the region has about 30 per cent of the world's proven crude reserves and its governments depend on oil revenue to fund much of their spending.
That argument understates Gulf countries' currency reserves and investment inflows that allow them to protect the pegs when oil prices are falling, according to analysts and economists including Farouk Soussa at Citigroup Inc. Gulf nations are also large importers of food, consumer goods and equipment, making a currency devaluation unattractive, he said. "I don't see a policy desire to move away from the dollar," said Soussa, the bank's London-based chief Middle East economist. Abandoning the peg will boost inflation, "which is not a policy objective that countries such as Bahrain and Oman want to introduce," he said.
Expectation that currency pegs may be abandoned gained momentum after Kazakhstan Prime Minister Karim Massimov said last week that most oil-producing countries, including Saudi Arabia and the United Arab Emirates, will move away from their currency pegs as the world enters a "new era" of low oil prices. Kazakhstan had scrapped a trading band for its currency, sending the tenge to a record low against the dollar. One-year forward contracts for the Saudi riyal jumped to their highest in more than a decade on August 24, signalling more bets that the currency will weaken. Contracts for the UAE dirham have also surged this month to the highest level since 2009.