Saudi Central Bank Pledges to Keep Dollar Peg; Forwards Drop

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Saudi Arabia’s central bank pledged to maintain the riyal’s dollar peg in a bid to end speculation that the country would devalue its currency after the plunge in oil prices.

Ahmed Alkholifey, the central bank’s deputy governor for research and international affairs, told Saudi-owned Al Arabiya television that authorities are committed to maintaining the peg at 3.75 riyals per dollar. One-year forward contracts for the riyal fell after his remarks.

Brent crude tumbled below $45 a barrel this month, adding pressure on public finances in the oil-dependent kingdom, which the IMF expects to post a budget deficit of about 20 percent of economic output this year. Currency forwards for the riyal rose this month to their highest since 2003, a sign some traders expected the currency to weaken after China devalued the renminbi and Kazakhstan relinquished control over the tenge.

“The peg serves the stability of the external accounts of the kingdom,” Fahad Alturki, Riyadh-based chief economist for Jadwa Investment, said by phone before Alkholifey’s comments. “The position of the government currently is strong compared to periods where there was also speculation on the riyal,” Alturki said, noting that pressures to drop the peg were greater in 1998 and 2008.

Saudi riyal 12-month forward contracts declined as much as 175 points on Tuesday, the biggest intra-day drop since Aug. 17, according to data compiled by Bloomberg. The kingdom’s benchmark Tadawul All Share Index for equities, which had closed before the central bank’s remarks, gained the most since December, trimming its losses this year to 9.5 percent.

Saudi equity losses were “nothing more than a contagion” from international markets, Alkholifey told Al Arabiya. The central bank expects the kingdom’s economy to expand 3 percent this year, he said, roughly in line with International Monetary Fund projections.