We have updated our Terms of Use.
Please read our new Privacy Statement before continuing.

Get Riyal

27 November 2015 By Andy Critchlow

Maintaining its currency peg to the dollar has limited Saudi Arabia’s options in dealing with falling oil revenues. The inflexible riyal means the kingdom can’t devalue to compensate for low oil prices. But given Riyadh’s huge forex reserves, the risks of suddenly floating its currency far outweigh the rewards.

The riyal has been fixed at a rate of 3.75 to the dollar since June 1986 and the policy has helped the kingdom control inflation and borrowing costs. However, a 40 percent decline in the value of Brent crude over the last year has exposed the limitations of this rigidity, and encouraged speculators to bet on its imminent demise.

Saudi Arabia faces economic headwinds. The International Monetary Fund forecasts a fiscal deficit of 20 percent of GDP this year. Because it pays government workers in riyals, a devaluation could reduce the need for steep spending cuts, which are politically difficult to make.

The kingdom also wouldn’t be the first petro-dollar economy to devalue. Kazakhstan allowed the tenge to float freely on Aug. 20. Bank of America Merrill Lynch commodities analysts now see Saudi Arabia de-pegging as the No. 1 “Black Swan” event for oil markets in 2016.

They need not worry. Although it is down to its last $640 billion in net foreign assets, the kingdom could still fund its projected fiscal deficit for several years without having to significantly increase borrowing should oil prices remain at depressed levels. Devaluing the riyal would raise the risk of inflation as the kingdom depends on foreign imports for the majority of its food and commercial goods.

Even more troubling would be a flight of capital from Saudi banks which could follow a devaluation. China has watched billions of dollars leave the country since it devalued the yuan on Aug. 11. A few weeks later, Saudi Arabian central bank officials were stressing their commitment to the dollar peg.

Falling oil prices are forcing Saudi Arabia’s rulers to make some tough decisions. Floating the riyal shouldn’t be one of them.

 

Email a friend

Please complete the form below.

Required fields *

*
*
*

(Separate multiple email addresses with commas)