Syed Rashid Husain It is not something new. Whenever oil prices drop, speculations about de-pegging of Saudi riyal with dollar begin to make waves - all around. With oil breaching the $40 mark last week, this too is no exception. Stress experienced in Beijing was enough to bring about a change in the overall sentiments about the global economy. Fears about the growth of Chinese economy and the equities rout in Beijing sent currency values reeling. More than $3.3 trillion was reportedly erased from the value of global equities after China's devaluation of its currency yuan over the last weeks. And with this revision, like all other commodities, oil too suffered a major blow. Saudi economy, so intertwined with the oil markets, is also faced with major blowbacks. Mid-August, the IMF warned of a widening Saudi fiscal deficit, touching 19.5% of the GDP this year. Rating agency Fitch also announced downgrading its outlook on Saudi Arabia's currency ratings last week to negative from stable. Noting the “twin fiscal shocks” of lower oil prices and increased spending, the rating agency forecast that the (Saudi) budget deficit will widen to 14.4 percent of gross domestic product this year. With turbulence all around, the Saudi stock market, closely aligned to the oil prices, too declined by a quarter in August, hovering currently at around its lowest level in more than two years. And as oil markets brace for storms, speculation about de-pegging of riyal with dollar and possibly of using a mixed basket for oil revenues, has been in air for weeks now. This has been an old issue with the oil producing countries, for it carries both political and economic implications. Earlier in February, the Azerbaijan central bank opted to abandon its currency manat's dollar peg and instead use a dollar-euro basket to manage the exchange rate. The action was taken after nearly 60 percent drop in crude prices between June 2014 and mid February this year and Western sanctions against Russia over its annexation of Crimea. Oil prices have lost a lot ground since then too. And then Central Asia's biggest energy producer Kazakhstan too last week announced withdrawing the central bank support for its currency tenge and in the process de-pegging it with dollar. The flotation triggered a 22 percent slide in its currency, the tenge, to a record low versus the dollar. The move followed China's shock devaluation of the yuan the week before, which impacted oil market sentiments considerably. Kazakh Prime Minister Karim Massimov while announcing the free floatation of the currency also nudged nations with managed exchange rates toward competitive devaluations of their own. This provided some credence to the ongoing speculation about a possible devaluation of riyal and other Gulf currencies. While making the announcement, Massimov emphasized, currency pegs in crude-producing nations are set to topple as the world enters a “new era” of low oil prices. “At the end of the day, most of the oil-producing countries will go into the free-floating regime,” including Saudi Arabia and the United Arab Emirates, he said in an interview last week in the capital, Astana. “I do not think that for the next three to five, maybe seven years, the price for commodities will come back to the level that it used to be at in 2014.” In wake of the scenario emerging in China and the resultant dramatic fall of oil prices last week, Saudi Arabia, along with other emerging markets, thus became the target of traders' bets that the oil-rich economy will eventually be forced into a devaluation. The debate about a possible Saudi and Gulf devaluation became so intense that officials had to come out in public to negate the impression. No devaluation or de-pegging was round the corner, they underlined. “On this occasion we would like to confirm that SAMA [the Saudi Arabian Monetary Agency] is committed to the policy of pegging the Saudi riyal with the American dollar,” Ahmed Abdulkarim Alkholifey, deputy governor for research and international affairs at SAMA, told Al Arabiya television last Tuesday. He then added that the central bank was monitoring the forwards market situation, and that both it and independent organizations, which he did not name, believed the riyal's peg of 3.75 to the dollar served the Saudi economy well. “Kuwait, Qatar, the UAE and Saudi Arabia (with their financial muscles) are not under any imminent pressure to ditch their pegs,” Robert Burgess, Deutsche Bank AG's chief economist for emerging markets in Europe, the Middle East and Africa was quoted as saying. Kuwait had abandoned its dollar peg in May 2007, moving the dinar (KD) instead to a basket of different currencies, though it is still heavily weighted towards dollar holdings. Oman and Bahrain, believed to be more at risk than their wealthier neighbors, with less oil to sell, thinner fiscal buffers and in Bahrain's case, more debt, also appeared in no mood to shelve the peg to dollar. "We are committed to keeping the Omani rial pegged to the US dollar," Hamood Sangour Al-Zadjali texted to Reuters in response to a question last week. The GCC countries have history on their side. Even amid the turmoil of the 2008 global financial crisis, when the price of oil plunged to $37 from $97, most Gulf nations stood by the pegs. In February 2008, OPEC Secretary General Abdullah El-Badri, was also of the view that the OPEC might switch to Euro pricing within a decade (or so) to combat the dollar's decline. "Maybe we can sell the oil in Euro," El-Badri then said. "It can be done but it will take time," he added. However, even then the GCC was not in favor. A few weeks after El-Badri's interview, Muhammad Al-Jasir, the then Vice Governor of SAMA underlined that calls to price oil in euro were politically motivated and Saudi Arabia would continue to price oil in dollars and maintain the dollar-peg for the Saudi riyal. Gulf oil producers have reasons for insisting on dollar pegs, despite some losses when oil prices are weak or dollar loses value in comparison to other currencies. The dollar pegs of the Gulf states are preventing some major rebalancing of the global economy, one cannot argue. Yet, a peg to dollar also helps the Gulf economies overcome the exchange-rate risk. Consequently, whether one likes it or not, oil continues to be priced in dollars. One thing should be clear now. Despite all the speculation in recent weeks, any de-pegging of Saudi riyal (and other Gulf currencies) with dollar is not going to happen - any time soon.
