Bets against Saudi riyal mount

Bets against Saudi Arabia’s riyal are mounting, despite repeated assurances from the country’s central bank that it would keep its currency pegged to the dollar.

Earlier this month, Societe Generale said in a research note that it saw at least a 25 percent chance of a near-term devaluation, adding that chances could be as high as 40 percent if oil prices remain at current levels.

The French bank explained that although the 30-year peg had previously survived lower oil prices, circumstances appear to be different this time as the market tests the government’s ability to defend the currency.

“The speculation is not surprising because onlookers can see that depressed oil prices are hurting government revenues,” Jameel Ahmad chief market analyst at FXTM, an international forex broker firm, told Argaam.

Last month, the Saudi Arabian Monetary Agency, the kingdom’s central bank, said it was committed to its US dollar peg at SAR 3.75. It also instructed banks in the country to halt the sale of options contracts on riyal forwards.

“The Saudis are doing the right thing,” Jan Dehn, head of research at the London-based Ashmore Investment Management told Argaam.

“They are using a combination of domestic austerity, debt issuance and running down reserves in order to gradually adjust the economy to lower oil prices. They need to continue on this path of gradualism. They have enough room to not act urgently,” he added.

The risks associated with a devalued riyal would be substantial, as the trickle-down effects would impact the entire Gulf Arab region.

“The impact on the stock markets in Saudi Arabia would more than likely be huge declines, but I would have thought that such a scenario could bring catastrophic risks to equity markets throughout the region at the very least,” Ahmad warned, adding that a devaluation or de-peg would only occur in a “worst case scenario.”

Even if the riyal’s peg remains in place in the near-term, the currency could possibly come under more pressure if the US dollar continues on a downward path.

“This would push up oil prices and potentially create an inflation problem in Saudi Arabia, which could require currency appreciation; but I do not see this happening,” he said. “Even if the dollar does crash, oil prices will likely not reach levels that would require Saudi to depeg.”

The riyal hit a record low in the forwards market in mid-January, breaching the 1000-point mark just days before the kingdom’s central bank announced the ban on options contracts.

Write to Joumana Saad at joumana.saad@argaamplus.com