Bad Saudi PR fuels riyal devaluation talk

Thu Nov 26, 2015 9:06am EST
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By Andrew Torchia

DUBAI (Reuters) - Speculation that Saudi Arabia could devalue its currency may owe more to a poor public relations effort by Saudi authorities than to the economic pressures on the kingdom.

Riyadh has the tools available to protect itself as low oil prices push the current account and budget balances of the world's top crude exporter deep into deficit, senior bankers in Saudi Arabia and the Gulf said.

In private conversations with Reuters this week, the bankers - many of whom are in contact with Saudi authorities - said Riyadh may detail a strategy to cope with an era of cheap oil as soon as next month, when the finance ministry presents the 2016 budget plan. The prospect of a riyal devaluation remains far-fetched, they said.

Political sensitivities and a culture of government secrecy have so far prevented officials from publicly discussing the likely policy options, keeping financial markets guessing about Riyadh's response to the sustained oil price slump. At $45.71 per barrel, Brent crude LCOc1 is down 20 percent this year after tumbling from above $115 last year.

Nervous investors are hedging against the risk that Saudi Arabia could abandon its three-decade-old peg of 3.75 riyals to the dollar. The riyal fell in the forwards market SAR1Y= this week to its lowest since 1999, after the price of credit default swaps covering Saudi sovereign debt SAGV5YUSAC=MP surpassed those insuring against a Philippines default PHGV5YUSAC=MP.

"A lot of uncertainty has to do with the size of the fiscal deficit expected this year," said Monica Malik, chief economist at Abu Dhabi Commercial Bank. As the government introduces spending cuts and other deficit-curbing measures, "this should help ease worries", she said.

The central bank and finance ministry did not respond to requests for comment on policy.

Malik said steps expected next year, including an end to one-off state salary bonuses and the introduction of a land tax, could cut the budget deficit to around 10 percent of gross domestic product from the current 20 percent.   Continued...

A Saudi jeweller counts Saudi Riyal banknotes money after selling gold to a customer in a jewellery shop at the surrounding area of the Grand Mosque during the annual haj pilgrimage in the holy city of Mecca October 20, 2012. REUTERS/Amr Abdallah Dalsh