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Saudi Arabia to hold on dollar peg

As oil prices remain below $40 per barrel after plunging almost 70 per cent, and the dollar continues to strengthen, Riyal's peg to the greenback might appear vulnerable to global investors.

Dubai: With liquid foreign assets estimated at $700 billion, Saudi Arabia, the world's largest oil exporter, can continue with its currency's peg to the dollar regardless of the headwinds the kingdom's economy faces from lower oil prices and subsequent tighter liquidity and weaker growth.
Allaying fears on the sustainability of the riyal's dollar peg, Bank of America Merrill Lynch said Saudi dollar peg will hold "given the kingdom's still sizeable foreign assets and the experience with implementing multi-year fiscal adjustments."
As oil prices remain below $40 per barrel after plunging almost 70 per cent, and the dollar continues to strengthen, Riyal's peg to the greenback might appear vulnerable to global investors who doubt whether Saudi Arabia will be able and willing to maintain its currency peg or will follow in the footsteps of its oil exporting counterpart Russia, which had de-pegged its currency.
Already, Saudi Arabian Monetary Authority had depleted more than $100 billion of the kingdom's foreign exchange reserves over the 11 month period between January 2015 and December 2015 to keep Riyal's dollar peg by buying local currency at a feverish rate, BoA Merrill Lynch said.
Analysts at BoA Merrill Lynch estimate that the kingdom's liquid foreign assets of $700 billion, which is 100 per cent of its gross domestic product, could last five-six years at unchanged fiscal policies.
However, latest data shows that the kingdom's net foreign assets declined by 1.7 per cent in February to $548 billion to reach its lowest point since May 2012. From its all-time high of $737 billion in August 2014 it is down 21 per cent or about $153 billion in a year and half.
"At this pace of depletion reserves could be precariously low in two years if oil prices do not reverse higher or if the Saudi government does not cut some of the massive subsidies in the economy at a fast pace," a Weekly Economic Review by Dubai Chapter of ICAI said.
"Still, at current oil prices, a radical fiscal policy overhaul is required to stabilize forex reserves. At $25 per barrel, four to five per cent of GDP's annual fiscal consolidation effort is required to keep the Saudi Arabian Monetary Authority's forex reserves at a third of their level while exhausting government deposits at SAMA. We think this could be achieved through capex cuts, value-added tax introduction or subsidy reforms," BoA Merrill Lynch analysts said.
"The Saudi macro story is likely to have peaked if oil prices stay low for long. We expect twin deficits, tighter liquidity, weaker real GDP growth and a softer non-hydrocarbon sector growth given likely fiscal policy tightening," they said.
Amid high expectations about the upcoming Doha meeting of April 17, crude oil prices headed lower as Prince Mohammed bin Salman bin Abdulaziz, Saudi Deputy Crown Prince, Second Deputy Premier and Minister of Defence, mentioned that Saudi will freeze oil output only if Iran and other major producers agree to curb theirs.
The initial Doha Accord in February was an important first step for Opec and non-Opec in attempting to stabilise the market. "The accord also confirms our view that GCC policy makers intend to use fiscal policies, and possibly energy policies if needed, to address the oil price slump rather than adjusting the pegs," BoA Merrill Lynch said.
Prince Mohammed bin Salman also announced plans for setting up a Public Investment Fund (PIF) as the way forward that will control about $2 trillion in assets to provide government with non-oil revenues to sustain the kingdom's growth.
- issacjohn@khaleejtimes.com