Saudi Arabia Says It Remains Committed to Dollar Peg
Cheap oil, record budget deficit had raised speculation over currency link


By Ahmed Al Omran and Nikhil Lohade
Updated Jan. 11, 2016 10:34 a.m. ET

RIYADH—Saudi Arabia will maintain the riyal’s peg to the U.S. dollar, the governor of the country’s central bank said Monday, while criticizing bets against the currency.

In a statement posted on the website of Saudi Arabian Monetary Agency, as the central bank is known, governor Fahad al-Mubarak said speculation was driving volatility in the forward market for the Saudi riyal, but the country’s financial and economic fundamentals remained stable.

“I would like to reiterate our official position that Saudi Arabian Monetary Agency will uphold its mandate of maintaining the peg, “ the governor said.

The riyal is fixed at roughly 3.75 to the dollar, but one-year forward contracts have hit multiyear highs in the past days—reflecting speculation on a weaker riyal—after the kingdom ran a record budget deficit of nearly $98 billion last year, forcing it to announce late last month spending and subsidy cuts for 2016 to cope with a fall in the global price of oil, the kingdom’s main revenue earner.

A sharp fall in the price of oil since the middle of 2014 has put immense pressure on Saudi Arabia’s petrodollar-dependent economy, with some investors betting in recent months that the kingdom would let go of the nearly 30-year old peg as foreign-exchange reserves decline. These have fallen to $635.5 billion at the end of November, down 15% from a peak of $746 billion in August last year, according to the latest central bank data.

Analysts say the central bank has spent billions to maintain the currency peg; in the past, the has worked well for Saudi Arabia, giving it stability as it enjoyed a decade of high-price oil.

But income from oil sales has slumped, adding strains to Saudi Arabia’s finances. Abandoning the peg would stretch those dollars as the riyal would weaken.

Backing away from peg pledges isn’t unprecedented, however. Officials at the Swiss National Bank, SNBN -0.09 % ▼for instance, publicly backed the franc’s link to the euro mere days before the bank stunned markets by abandoning it a year ago.

Still, most analysts don’t see Saudi Arabia abandoning its peg in the near- to midterm, as repayment costs for households and corporates that have borrowed in foreign currencies will rise in local-currency terms. Consumer price inflation is likely to accelerate due to a rise in import prices, which the government can ill-afford after cutting subsidies.

And even if the peg were adjusted rather than abandoned, this would add uncertainty about future adjustments, and ultimately make it more vulnerable to speculative attacks.

“The peg is a key policy anchor,” said Paul Gamble, senior director for sovereigns at Fitch Ratings. “There is a huge capacity to defend it and a strong political commitment to it.”

http://www.wsj.com/articles/saudi-arabia-says-remains-committed-to-dollar-peg-1452505319




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It will maintain the U.S. dollar.The governor on the website as the central bank Fahad al-Mubarak in the forward market reiterate our official position.

It is fixed to forward nearly $98 billion last year, with a fall in the global price of oil.
A sharp fall in the price of oil since the middle of 2014 has put immense pressure on Saudi Arabia’s petrodollar-dependent economy,These have fallen to $635.5 billion at the end of November, down 15% from a peak of $746 billion in August last year, according to the latest central bank data.

Analysts say it has worked well for Saudi Arabia,But income from oil sales has slumped, adding strains to Saudi Arabia’s finances.

The franc’s link....?

In foreign currencies will rise in local-currency terms.
In import prices,the government can ill-afford after cutting subsidies.