Saudi dol­lar cur­rency peg likely to be fol­lowed by neigh­bours

The Pak Banker - - BUSINESS -

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.

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