25% probability of Saudi FX devaluation soon, says SocGen

There is at least a 25 percent chance of a near-term devaluation of the Saudi Arabian riyal, rising to 40 percent should oil prices stay at current levels throughout 2016, Societe Generale said on Thursday.

The Saudi riyal's 30-year old peg to the dollar has come under pressure in the wake of oil's price collapse, as have other regional currency pegs, although authorities have declared their intention to use their vast foreign exchange reserves to hold the pegs.

Societe Generale said that while the pegs had withstood previous episodes of low oil prices and dollar strength, this time appeared different.

"The probability of the pegs failing is one of ability and willingness to defend the regime at all costs. The market is testing the authorities' willingness, and rightfully so," the French bank said in a note.

They calculated the probability of a devaluation or change in the exchange rate regime to be as high as 60 percent if oil prices stayed below $50 a barrel for the next two years.

"Risk-reward continues to favour positioning for the pegs to be adjusted or scrapped. We advise eschewing the temptation to earn carry through being short dollars against the Saudi Riyal."

SocGen noted that Gulf fiscal balances are in worse shape than in the past and second, Saudi Arabia, once a price-setter in global oil markets, has become more of a price-taker, with less power to influence markets.

Third, Gulf economies have increasingly decoupled from the United States, the bank said, adding all the above factors made a more flexible exchange rate desirable.

Related:
Join the Discussion

Disclaimer:The view expressed here by our readers are not necessarily shared by Arabian Business, its employees, sponsors or its advertisers.

Please post responsibly. Commenter Rules

  • No comments yet, be the first!

All comments are subject to approval before appearing

Further reading

Features & Analysis
Saudis cut wage, benefit bill in delicate pursuit of austerity

Saudis cut wage, benefit bill in delicate pursuit of austerity

Some Saudis appear prepared to accept austerity following the...

Cash crunch at Saudi firm casts shadow over Lebanon's Hariris

Cash crunch at Saudi firm casts shadow over Lebanon's Hariris

The troubles at Saudi Oger have led to a cash crunch and layoffs...

Fly economy class, share an office: Qatar's new reality

Fly economy class, share an office: Qatar's new reality

Gov't employees are being asked to make savings as low energy...

Most Discussed
sponsoredTracking