Currency Peg Series: Saudi Arabia verbally defends Dollar peg
Ahmed al-Kholifey, Governor of Saudi Arabia’s Monetary Authority (SAMA) dismissed that kingdom may consider revising its currency peg with U.S. Dollar, which will result in a significant devaluation of Riyal from its current 3.75 against Dollar.
Speaking with Al-Arabia, he said the agency doesn’t intend to change the exchange rate policy and there are no benefits from changing the current exchange rate. However speculators have been betting via forward and options market that rout in oil prices since summer of 2014, would force the kingdom in devaluing its currency. Lower oil price has led to fiscal crisis in Saudi Arabia, which is seeing deficit widen to 16% of GDP.
Recent rise in oil prices, may ease the pain but fiscal break even for Saudi Arabia is close to $100/barrel. Oil is trading at half of that. This fiscal stretch is threatening the banking sector, which relies on oil revenues for deposits. Many segment of the economy has been facing payment delays, which has been stressing broader economy. SAMA has launched probes to discourage devaluation speculations by use of forward options.
Saudi Arabia’s FX reserve has declined from $745.8 billion in 2014 to $580.7 billion as of April, 2016. Kingdom is extremely vulnerable to lower oil price.
Saudi Arabia has recently tapped into international bond markets to raise $10 billion in order to prevent over-stressing domestic banks.
We expect, Saudi Arabia to consider peg-break, if oil prices decline again.