‘Stay Away From the Saudi Riyal Peg Trade,’ Deutsche Bank Says

Saudi Arabia has sufficient reserves to defend its currency’s peg to the dollar, and investors should wait for better levels before buying 12-month riyal forwards, according to Deutsche Bank AG.

“Stay away from the Saudi riyal peg trade,” the world’s second-biggest currency trader said in an e-mailed report. “The Saudis have several as-yet untapped sources of dollar financing. One is to simply issue dollar debt. Debt was far higher and reserves far lower during successful defenses in 1998-2003.”

While the world’s biggest oil exporter’s foreign reserves fell for 10 straight months through November, at more than $600 billion, they’re almost the size of Saudi Arabia’s gross domestic product, according to the bank. A devaluation will not restore the kingdom’s competitiveness as oil dominates exports and make imports of labor and materials immediately more expensive, it said, citing chief Saudi economist Melhem Melhem.

Twelve-month forward contracts for the riyal climbed to the highest since at least December 1996 on Friday, reflecting growing speculation the country may devalue its currency for the first time in three decades. The kingdom on Monday pledged for the second time in four months to stick with the peg and said “misperception” is driving forwards contracts higher.

Saudi Arabia’s budget has been under pressure after crude, the nation’s main source of income, plunged to the lowest level since 2004. The kingdom has announced plans to cut expenditure and subsidies to cope with the decline and may tap local and international debt markets this year to fund a deficit.

The currency pegs of Oman and Bahrain are far more vulnerable than Saudi Arabia’s, according to the Deutsche Bank report.

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