Will Oil Slump Force Saudi Arabia to Abandon Riyal's Dollar Peg?

  • Economists see more negatives than positives from devaluation
  • Weak currency would raise living costs, create political risk

The slump in crude prices to the lowest in more than a decade has saddled Saudi Arabia with budget and current account deficits, eaten into its foreign assets and fueled speculation that the world’s largest oil exporter will have to abandon a three-decade-old currency peg to the U.S. dollar.

Authorities this week ordered banks to limit traders’ ability to make cheap bets against the riyal, and central bank Governor Fahad Al-Mubarak has pledged twice in the past four months to stand by the peg.

Four economists explain what would happen if he changed his mind, and why that’s extremely unlikely.

  • Saudi Arabia relies on imports, and would therefore see a sharp increase in inflation, said James Reeve, deputy chief economist at Samba Financial Group. The government may be willing to reduce oil output because its riyal earnings would increase, “but that’s highly speculative,” he said.

  • The cost of imported goods would go up by 30 to 40 percent, raising the cost of living for middle-class Saudis and creating political risks, said John Sfakianakis, a Riyadh-based economist and former adviser to the Saudi government. “When oil is at these levels, what is economically correct and what is politically feasible are two different things,” he said.

  • David Butter, an associate fellow at U.K.-based research center Chatham House, said a devaluation would be complicated for the central bank to manage and remain “quite disruptive for a time,” with a negligible impact on oil prices and export competitiveness. “Oil would still be priced in dollars, so that would be irrelevant,” he said.

  • A currency devaluation would remove a key pillar of certainty for investors and lead to more speculation anytime oil prices are volatile, said Monica Malik, chief economist at Abu Dhabi Commercial Bank. "That would be another key negative," she said.

  • Reeve: The peg is indispensable to Saudi’s economic policy and underpins confidence. The government “will not break it unless forced to,” he said.

  • “Time and time again, Saudi Arabia has shown to the world that even in very difficult times, they have not changed their currency regime,” said Sfakianakis. “The average Saudi would be very critical of a move that could see their income decline or inflationary pressures bringing down their incomes.”

  • Butter said: “One of the benefits would be liberalizing the monetary policy, but it would introduce unpredictability. Why take that risk when it’s not really necessary and doesn’t really change anything fundamental?”

  • There is no “fundamental pressure” on Saudi’s peg, said Malik. The benefits are “outweighing the negatives” for all of the currency pegs across the six-nation Gulf Cooperation Council, she said.
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