Speculation grows of Saudi revaluation

The Saudi Arabian Monetary Agency’s decision to keep interest rates on hold after the Federal Reserve cut rates last week has sparked speculation that the kingdom might revalue the riyal for the first time in 21 years.

The Saudi Arabian Monetary Agency’s decision to keep interest rates on hold after the Federal Reserve cut rates last week has sparked speculation that the kingdom might revalue the riyal for the first time in 21 years.

There has even been talk that the Saudis might abandon the riyal’s peg to the dollar, which has stood at SR3.75 since December 1986.

Hedge funds have set going a wave of speculation, buying the riyal through the foreign exchange forward market. More than $10bn was pumped into the riyal last week. Similar levels of speculative flows were seen in the three months before Kuwait de-pegged the dinar from the US dollar in May.

This pushed the riyal to 21-year high of SR3.7352 against the dollar on Monday.

The Saudis said they were leaving interest rates unchanged in an effort to quell inflation, at present running at a seven-year high of around 4 per cent.

“It’s not necessary that there will be a de-pegging of the riyal from the dollar, not in the near future,” said Ihsan Bu-Hulaiga, head of the government-appointed finance committee that advises King Abdullah. “The issue is that we have an abundance of liquidity in the economy,’’

Dr John Sfakianakis, chief economist with Riyadh-based SABB, said imported inflation only accounted for 32 per cent of the kingdom’s consumer price index rise. Echoing the arguments of Saudi officials, he said much of the inflationary pressure stemmed from imbalances in the booming economy, such as rent and wages.

A revaluation would erode the foreign assets of the government and citizens, much of which remained in dollars, said Mr Sfakianakis, who estimates that SAMA holds around $1,000bn in foreign exchange reserves and assets.

The main source of revenue – crude oil – remains priced in dollars, further undermining arguments for breaking the 21-year peg.

Simon Williams, an economist with HSBC in Dubai, did not believe a revaluation was imminent, but said the shortcomings of the peg were highlighted by the fact that the US and Saudi economies were so out of sync.

“SAMA is aware of this and may well be looking at the issue again, but it has been through this cycle before and not been persuaded by the arguments for adjustment,” said Mr Williams. “SAMA will act only when it judges the time to be right. It certainly won’t allow its hand to be forced by offshore flows.”

Meg Browne, at Brown Brothers Harriman, dismissed suggestions that the dollar and US bond markets would suffer if SAMA were to abandon the peg.

“While SAMA may abandon the peg at some point, it is unlikely this will lead to a mass exodus from US bond markets, especially by central bank reserve managers,” she said.

She argued that while some diversification away from the dollar might be taking place, the bulk of the world’s reserves, over 63 per cent, were held in the currency and overall dollar holdings were still growing.

“For Saudi Arabia, where all exports are earned in dollars and 75 per cent of imports are in dollars, the chance the central bank will sharply alter its reserve allocation are slim,” she said.

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