Why Saudi Arabia will not devalue or depeg the riyal

The collapse in brent crude oil below $30, a 20 per cent fall in the Tadawul share index in January 2016's global equity bloodbath, the cut in fuel subsidies and geopolitical risk escalation in the Middle East has spawned speculation in financial markets that Saudi Arabia will devalue the kingdom's riyal, now pegged at 3.75 against the US dollar. Senior princes of the royal family and the governor of the Saudi Arabian Monetary Agency (Sama) have reaffirmed Riyadh's commitment to its US dollar peg, a source of economic stability in the Gulf for the past two generations. I agree with Saudi Arabia's financial policymakers that there is no need to abandon a dollar peg that has served the kingdom so well ever since the 1980's during times of war and peace in the Middle East, during times of inflation and deflation, during times of oil booms and oil busts. My call? Saudi Arabia will not abandon its US dollar peg. Why?
One, Saudi Arabia, unlike Russia or Canada, imports most of its food. A devaluation of the Saudi riyal would raise food prices.
Two, Saudi Arabia faces a $98 billion budget deficit that is 17 per cent of GDP. Yet Saudi Arabia has also amassed $640 billion in state hard currency reserves managed by Sama. Saudi Arabia has miniscule public debt, unlike in the Shaikh Yamani era oil bust in the 1980's. Saudi Arabia can easily issue $20 billion in sovereign eurobonds in the international capital markets as well as borrow another $20 billion in the Saudi riyal money market.
Devaluation is far too draconian a policy response for a de facto liquidity, not solvency crisis. Saudi Arabia has begun the process of fiscal austerity and government borrowing has led to a rise in Saudi riyal rates above Libor in the money markets.
Ever since the reign of the late King Faisal, Saudi Arabia's dollar peg has symbolised the innate financial conservatism of the world's largest crude exporter, the royal family's commitment to preserve a stable business climate for the kingdom's merchant elite and foreign investors and the geopolitical realities of the oil for security alliance with Washington, forged by President Franklin D. Roosevelt and late King Abdul Aziz Al Saud, founder of the kingdom, aboard a Red Sea warship in 1945. "Riyalpolitik" preludes devaluation. After all, Saudi Arbia survived the 16 year oil bust in the 1980's and 1990's without a devaluation. It will survive the next decade with its US dollar peg intact.
Four, oil is 60 per cent of Saudi Arabia's GDP and 85 per cent of the government budget. Unlike Canada or Australia, Saudi Arabia enjoys no J-curve export boom if it devalues the riyal. The world oil market is denominated in US dollar, which also happens to be the world (and Sama's) reserve currency. There is simply no macroeconomic or export benefit to devaluation.
Five, the recent budget freeze and subsidy cuts reinforce the kingdom's commitment to fiscal reform, as well as opening its capital markets to foreign institutional investors. Economic institutions such as SAGIA and the CMA reflect the kingdom's eagerness to attract foreign investors and integrate its $750 billion economy, the largest in the Arab world, with global capitalism. The Saudi riyal's dollar peg is a fundamental pillar of the kingdom's main appeal to foreign investors and corporate titans.
Six, even though Sama has drawn down $100 billion from offshore fund managers, its hard currency reserves exceed $640 billion. Wall Street and the City of London's cognoscenti know that Sama can and will defend the dollar peg with its epic financial firepower.
Seven, the 2016 Saudi budget envisages 14 per cent cuts in government spending and a rollback in subsidies and lavish welfare benefits. Crown Prince Mohammed bin Nayef and Deputy Crown Prince Mohammed bin Salman both appreciate that a stable Saudi riyal boosts social stability at a time of fiscal belt tightening. As the kingdom cuts spending, its budget deficit will shrink and reassure investors. Saudi Arabia does not want or need higher food inflation, imported goods price increases or the loss of offshore investor confidence that could well follow devaluation. So "Realpolitik" and economics suggest Saudi Arabia will not devalue the riyal.

• Saudi Arabia