RIYADH: Tumult in oil markets was enough to create speculations about a possible de-pegging of riyal with dollar and possibly of using a mixed basket for oil revenues.

Fears about the growth of Chinese economy and equities rout in Beijing sent currency values reeling.

More than $3.3 trillion was erased from the value of global equities after China’s devaluation of yuan. And with this revision, like all other commodities, oil too suffered a major blow.

Saudi economy, so intertwined with the oil markets, is also faced with major blowbacks.

Mid-August, the IMF warned of a widening Saudi fiscal deficit, touching 19.5 per cent of the Gross Domestic Product (GDP) this year.

Rating agency Fitch also announced downgrading its outlook on Saudi Arabia’s currency ratings, to negative from stable.

The Saudi stock market too declined by a quarter in August, hovering currently at its lowest level in more than two years.

The issue of pegging is a sensitive issue. Politics and economics are intertwined — in more than one ways — in this case.

Earlier in February, the Azerbaijan central bank opted to abandon its currency manat’s dollar peg and instead use dollar-euro basket to manage the exchange rate.

And then Central Asia’s biggest energy producer Kazakhstan too last week announced withdrawing the central bank support for its currency tenge and in the process de-pegging it with dollar.

Kazakh Prime Minister Karim Massimov while announcing the free floatation of the currency also nudged other oil producers with managed exchange rates to go for devaluation.

This provided some credence to the ongoing speculation about a possible devaluation of riyal and other Gulf currencies.

Currency pegs in crude-producing nations are set to topple as the world enters a “new era” of low oil prices, Massimov emphasised.

“At the end of the day, most of the oil-producing countries will go into the free-floating regime,” including Saudi Arabia and the United Arab Emirates, he said in an interview last week.

“I do not think that for the next three to five, maybe seven years, the price for commodities will come back to the level that it used to be at in 2014.”

In wake of the scenario emerging in China and the resultant dramatic fall of oil prices last week, Saudi Arabia, along with other emerging markets, thus became the target of traders’ bets that the oil-rich economy will eventually be forced into devaluation.

The debate about a possible Saudi and Gulf devaluation became so intense that officials had to come out in public to negate the impression. No devaluation or de-pegging was round the corner, they underlined.

“On this occasion, we would like to confirm that SAMA [the Saudi Arabian Monetary Agency] is committed to the policy of pegging the Saudi riyal with the American dollar,” Ahmed Abdulkarim Alkholifey, deputy governor for research and international affairs at SAMA, said last week.

He then added that the central bank was monitoring the forwards market situation, and that the riyal’s peg of 3.75 to the dollar was serving the economy well.

“Kuwait, Qatar, the UAE and Saudi Arabia (with their financial muscles) are not under any imminent pressure to ditch their pegs,” Robert Burgess of Deutsche Bank AG was quoted as saying.

Kuwait had abandoned its dollar peg in May 2007, moving the dinar (KD) instead to a basket of different currencies, though it is still heavily weighted towards dollar holdings.

Oman and Bahrain, believed to be more at risk than their wealthier neighbours, with less oil to sell, thinner fiscal buffers and in Bahrain’s case, more debt, also appeared in no mood to shelve the peg to dollar.

“We are committed to keeping the Omani rial pegged to the US dollar,” Hamood Sangour al-Zadjali texted to Reuters in response to a question last week.

The dollar pegs of the Gulf states are preventing some major rebalancing of the global economy, one cannot argue. Yet, it is there to stay — for the time being. Despite all the speculation, any de-pegging of Saudi riyal (and other Gulf currencies) with dollar is not going to happen — any time soon.

Published in Dawn, August 30th, 2015

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