Debate over Saudi riyal revaluation increases
Sunday, 25 November 2007
Andrew England in Cairo and Simeon Kerr in Dubai, FT Syndication Service
After more than a week of heated debate about the Gulf currencies' peg to the weak US dollar, speculation is intensifying about whether Saudi Arabia will revalue the riyal for the first time in 21 years.
The Saudi Arabian Monetary Agency has insisted that it would not change the peg, in spite of growing concerns about inflation, which rose to a high of 4.9 per cent in September. It argues that the dollar's depreciation is having a small impact on inflation, and points out the state's main export - oil - is priced in dollars, and about 65 per cent of its imports are in the US currency.
However, one economist based in Riyadh says his expectations have changed since Opec, the oil producers' cartel, took the decision to study the effect of the falling dollar and as pressure has built on the government to be seen to tackle inflation.
"It's not a question of if, but a question of when," the economist said. "What will happen is you will probably see a revaluation but not a change in the peg."
The economist said that while a revaluation would not have a significant impact on inflation, which is fuelled mainly by rising food prices and rents, it would be a "gesture" to the public that the government was fighting inflation.
Other economists in Riyadh, however, say they do not expect a change in policy.
Al-Riyadh, a Saudi newspaper, last Tuesday quoted Abdul-Aziz al-Uwaisheg, who is head of studies and economic integration at the general secretariat of the Gulf Co-operation Council (GCC), as saying that the kingdom might be considering a revaluation. However, Mr Uwaisheg later said he had been misquoted.
The kingdom boasts the region's largest economy. Officials from the United Arab Emirates, who are under pressure to revalue the dirham, have said they would not act before Saudi Arabia, which has maintained the riyal's dollar peg since 1986. With the UAE dirham 15 per cent undervalued, Citigroup believes the emirates' central bank, could move ahead with an initial revaluation of 5.0 per cent despite public commitment to GCC unity.
The six GCC states are due to hold a summit next month and it would be likely to be the most closely watched meeting in years.
Inflation in Saudi Arabia is much lower than in the UAE and Qatar, where it is double-digit, but the kingdom's population is larger and is feeling the pinch of rising prices.
Some economists in Riyadh say that while speculative currency traders are targeting the riyal, they do not expect the central bank to alter its position unless the dollar significantly weakens further.
They argue that a revaluation would reduce the value of the government's foreign reserve assets - which are mostly in dollars - when converted into local currency and have a similar impact on revenue as 90 per cent of its exports - oil - are in dollars. They also say that the Saudi Monetary Authority is concerned that if it revalues once it would be harder for it to resist similar moves in future.
"Our view has changed a bit. What we didn't really factor in is the possibility of precipitous decline in the dollar. There is some point in the dollar decline where policymakers must say this is ridiculous and something must be done. But that reflects the rate itself, not underlying policy of the peg itself to the dollar," said Brad Bourland, chief economist at Jadwa Investment. "At some point perhaps an adjustment in the rate is necessary, but I don't think we are there yet."
Trades in riyals between banks, especially outside Saudi Arabia, moved as low as 3.71 to the dollar last week, compared with the peg rate of 3.75.
After more than a week of heated debate about the Gulf currencies' peg to the weak US dollar, speculation is intensifying about whether Saudi Arabia will revalue the riyal for the first time in 21 years.
The Saudi Arabian Monetary Agency has insisted that it would not change the peg, in spite of growing concerns about inflation, which rose to a high of 4.9 per cent in September. It argues that the dollar's depreciation is having a small impact on inflation, and points out the state's main export - oil - is priced in dollars, and about 65 per cent of its imports are in the US currency.
However, one economist based in Riyadh says his expectations have changed since Opec, the oil producers' cartel, took the decision to study the effect of the falling dollar and as pressure has built on the government to be seen to tackle inflation.
"It's not a question of if, but a question of when," the economist said. "What will happen is you will probably see a revaluation but not a change in the peg."
The economist said that while a revaluation would not have a significant impact on inflation, which is fuelled mainly by rising food prices and rents, it would be a "gesture" to the public that the government was fighting inflation.
Other economists in Riyadh, however, say they do not expect a change in policy.
Al-Riyadh, a Saudi newspaper, last Tuesday quoted Abdul-Aziz al-Uwaisheg, who is head of studies and economic integration at the general secretariat of the Gulf Co-operation Council (GCC), as saying that the kingdom might be considering a revaluation. However, Mr Uwaisheg later said he had been misquoted.
The kingdom boasts the region's largest economy. Officials from the United Arab Emirates, who are under pressure to revalue the dirham, have said they would not act before Saudi Arabia, which has maintained the riyal's dollar peg since 1986. With the UAE dirham 15 per cent undervalued, Citigroup believes the emirates' central bank, could move ahead with an initial revaluation of 5.0 per cent despite public commitment to GCC unity.
The six GCC states are due to hold a summit next month and it would be likely to be the most closely watched meeting in years.
Inflation in Saudi Arabia is much lower than in the UAE and Qatar, where it is double-digit, but the kingdom's population is larger and is feeling the pinch of rising prices.
Some economists in Riyadh say that while speculative currency traders are targeting the riyal, they do not expect the central bank to alter its position unless the dollar significantly weakens further.
They argue that a revaluation would reduce the value of the government's foreign reserve assets - which are mostly in dollars - when converted into local currency and have a similar impact on revenue as 90 per cent of its exports - oil - are in dollars. They also say that the Saudi Monetary Authority is concerned that if it revalues once it would be harder for it to resist similar moves in future.
"Our view has changed a bit. What we didn't really factor in is the possibility of precipitous decline in the dollar. There is some point in the dollar decline where policymakers must say this is ridiculous and something must be done. But that reflects the rate itself, not underlying policy of the peg itself to the dollar," said Brad Bourland, chief economist at Jadwa Investment. "At some point perhaps an adjustment in the rate is necessary, but I don't think we are there yet."
Trades in riyals between banks, especially outside Saudi Arabia, moved as low as 3.71 to the dollar last week, compared with the peg rate of 3.75.