Saudi to maintain riyal rate

Saudi Arabia will ride out the latest spell of dollar weakness and maintain the riyal's exchange rate against the U.S. currency at least until 2010, Jadwa Investment Co. said in a research note.

"None of the arguments that have been put forward for an adjustment to the exchange rate are compelling given the cost in terms of monetary policy credibility, lost revenues and damage to non-oil competitiveness," Brad Bourland, Jadwa's head of research, said in the note received on Tuesday.

Markets have been betting delays to a regional monetary union project and the dollar's decline to record lows against the euro this month would tempt some Gulf states to change dollar-pegged exchange rates, especially after Kuwait broke ranks and adopted a currency basket in May.

"The riyal's peg to the U.S. dollar will remain unchanged at the current level of 3.75 Saudi riyals throughout our forecast period (2007-2010)," Bourland wrote.

"A revaluation would impair the riyal value of oil revenues and assets denominated in dollars held by the government, banks and companies," he added.

Saudi Arabia cannot allow its currency to float freely as it would add more uncertainty to an economy that is already vulnerable to oil price fluctuations, Bourland said.

The central bank, the Saudi Arabia Monetary Agency (SAMA), has repeatedly said it does not plan to change exchange rate policy.

"It's (SAMA's) vast stock of foreign assets gives it the ammunition to defend the peg. Therefore, while there may be occasional speculative pressure on the peg, it will not change," Bourland said.

SAMA's net foreign assets were worth 98.5 billion riyals ($26.27 billion) at the end of May.

Jadwa expects inflation to rise from 2.3 % in 2006 to 3.5 % in 2007 before slowing to 3.3 % and 2.7 % in 2008 and 2009.

Jadwa forecast real gross domestic product growth of 2.7 % in 2007 and 6.3 % in 2008, driven by non-oil private sector and government spending. The economy grew 4.2 % in 2006.

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