Saudi Riyal Market Calms After Jolt Due To Capital Outflow

The Saudi Arabian riyal spot and forward markets calmed on Tuesday after being jolted last week by unexpectedly large outflows of funds from the kingdom, traders said.

Last Wedesday, the riyal tumbled unusually far beyond its peg of 3.75 against the U.S. dollar in the spot market, to as low as 3.7530. In the previous several years, the rate had never moved beyond 3.7510.

The spot market pressure triggered a move in the forward market, where one-year dollar/riyal forwards rose on Tuesday last week as high as 109 points, their highest level since the global financial crisis in 2009.

The fund outflows may have been related to the plunge of oil prices to four-year lows in the last few weeks; oil provides most state revenues and export earnings for Saudi Arabia and other Gulf nations.

However, the foreign exchange markets began stabilising late last week and on Tuesday, the spot riyal rate was down to 3.7516 – still unusually high, but much lower than last week’s peak.

One-year dollar/riyal forwards were down to 43 points, within the range of recent months.

Although one banker said last week’s move in the forward market was triggered by options trade among U.S. hedge funds reacting to the oil price slide, several traders in the Gulf said they did not think the volatility indicated any fundamental change of sentiment towards Saudi Arabia.

“It’s liquidity-driven. The market got caught out by one or two significantly large flows, albeit the onshore players seem happy enough to continue to sell USD’s into the rally,” the head of currency trading at a local bank said. He declined to be named as he is not allowed speak to the press.

He added, “If oil continues to trade heavy we may see more days/weeks like this, but there’s little chance of any change in the peg, so these events simply play out as isolated liquidity- driven anomalies.”

Although global oil prices are now below levels which Saudi Arabia is believed to need to balance its state budget over the long term, the country’s huge fiscal and foreign exchange reserves mean it could keep spending heavily for years and easily defend its currency peg from any pressure, economists believe.

An International Monetary Fund study published this week found capital outflows from Gulf Arab states had totalled only about $780 million since the U.S. Federal Reserve unveiled its plan to wind down asset purchases in May last year.

This was a small fraction of the money leaving other emerging markets – confirming that because of their confortable current account and state budget positions, the Gulf oil exporters are seen by international investors as better equipped to handle rising interest rates than most areas of the world.