30/08/2015 05:45 AST
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 poli
Saudi Gazette
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