Saudi Arabia cuts currency speculation short

Saudi Arabia’s central bank has instructed the country’s banks to stop selling a financial product used to bet against the kingdom’s exchange rate. Investors have been using options contracts on riyal forwards – which allow investors to benefit if the value of the riyal falls in the future – to bet that the kingdom will […]

Saudi Arabia’s central bank has instructed the country’s banks to stop selling a financial product used to bet against the kingdom’s exchange rate.

Investors have been using options contracts on riyal forwards – which allow investors to benefit if the value of the riyal falls in the future – to bet that the kingdom will abandon its peg to the US dollar.

But the Saudi Arabian Monetary Agency has ordered banks to end sales of the options, Bloomberg reported.

One-year dollar-riyal forwards rose above 1020 points last week before declining, indicating a higher likelihood that the Saudi currency would fall relative to the dollar over the next year.

June this year will mark the 30-year anniversary of Saudi Arabia’s peg to the dollar. That month, in 1986, the Saudi Arabian Monetary Agency set the value of 3.75 riyals to the dollar, a price that it has defended several times over the past three decades.

The dollar-riyal exchange rate has come under pressure as investors predict a higher likelihood that the kingdom will respond to the era of low oil prices by abandoning its tie to the dollar.

Low oil prices have hit government spending in Saudi Arabia, which depends on the sale of hydrocarbons for about 80 per cent of its revenue.

Devaluation is regarded by investors as one way for the kingdom to reduce the impact of the oil price crash. A cheaper riyal would mean that oil revenue is worth more domestically, which would reduce the deficit. It would also make Saudi non-oil exports – mostly petrochemicals and minerals – more competitive on global markets.

But Saudi authorities have repeatedly insisted that they have no plans to devalue the currency.

“This move is Saudi Arabia responding to speculative pressure on the currency pegs, and it’s signalling clearly that it has no view of changing the currency regime,” said Simon Williams, HSBC’s chief economist for the Middle East. Saudi Arabia is “protecting its economy against the negative impact of speculative flows”, he said.

“Questions over the peg will persist as long as oil prices remain low, [but] policymakers are committed to the peg. It’s seen them through good times and bad,” Mr Williams said.

Saudi Arabia has the financial firepower to intervene in currency markets if it chooses, but has so far opted for rhetoric rather than dollar purchases. The riyal is fully convertible to gold, meaning that the kingdom holds gold greater than the total value of its outstanding currency. That is just one of the buffers that the asset-rich state can draw down on were it to choose to intervene to maintain the peg.

“It’s a technical move to dampen speculation,” said Jason Tuvey, an emerging markets economist at Capital Economics.

abouyamourn@thenational.ae

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Source: Business

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