Saudi dollar peg under threat if low oil prices continue

audi Arabia’s currency peg to the United States dollar could be under threat should oil prices remain low, according to Saxo Bank’s head of forex strategy.

Currency speculators have put pressure on the riyal in recent months due to the country’s projected $87bn budget deficit in 2016, due to lower oil revenues.

Should low oil prices continue, John Hardy told Gulf Business the country might be forced to follow other oil exporters outside of the Gulf Cooperation Council in changing its monetary policy.

“If oil prices stay below $50, there is a very short time frame before reserves are wound back,” he said. “I’m not predicting the peg is going to break but I stand back and wonder how much pressure Saudi will absorb before changing its policies.”

He said if oil prices stay at the lower end of what they have been “it becomes a very high probability within three years” that the country would be forced to change the SAR 3.75 to the US dollar peg.

“Eventually if they are going to maintain the peg they will need to do some pretty strict medicine and I would suspect at some point if oil prices remain low it becomes less painful to consider the peg change rather than reducing the nominal amount that’s being traded in transfer payments.”

The governor of the country’s monetary agency Fahad al-Mubarak said in March it would continue to manage its monetary policies to achieve the goal of stabilising the value of the riyal at the exchange rate.

The Saudi Arabian Monetary Agency intervened in January to warn local banks to avoid betting on riyal devaluation.

In February, French bank Societe Generale estimated there was a 25 per cent chance of a near-term devaluation of the riyal, increasing to 40 per cent if oil prices maintain current levels until the end of the year.

Hardy suggested regional peer the United Arab Emirates had sufficient reserves to maintain its peg to the US dollar for a long period of time but the country could come under pressure should the Saudi peg be changed.

“It would certainly affect Dubai if the peg is destabilised because you’ll suddenly look a bit lonely with your peg even if you can maintain it,” he said.