Saudi inflation raises revaluation pressure

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REVALUATION PRESSURE: The severity of inflation and weakening of the dollar makes a continued stand against revaluation less certain, said investment bank Jadwa. (Getty Images)

Saudi Arabia could face internal pressure to revalue its dollar-pegged currency as inflation in the world's largest oil-exporter soars to a 30-year peak this year, a Saudi investment bank said on Monday.

Inflation in the largest Arab economy, home to 25 million people, almost doubled in the six months to March to a three-decade peak of 9.6%. A Reuters poll this week showed Saudi inflation averaging 9% this year, more than double its 2007 level.

"With all sectors of the population suffering from inflation and the weak exchange rate, there will be pressure on the government to respond," Jadwa Investment said. The riyal has been fixed at 3.75 to the dollar since 1986.

"While we have stated forcefully in past reports that no change will be forthcoming, we are less certain now, given the severity of inflation and the weakening of the dollar," Jadwa said.

Saudi Arabia has been the Gulf Arab region's biggest proponent of the dollar peg, saying repeatedly that it would not sever its link, even as the US currency tumbled to record troughs against the euro this year.

"The effect of the decline in the riyal will be clearly visible to the many Saudis that take their vacations in Europe," Jadwa said.

A source in Saudi Arabia told Reuters last November that the Gulf state and some of its neighbours were considering revaluing their currencies.

Saudi policymakers have since publicly dismissed this idea, saying a revaluation would only unleash expectations of more to come and would not solve an inflation problem being driven by soaring rents and high global commodity prices.

Revaluing by at least 15% "would have a clear and immediate impact on inflation and would provide some breathing space while supply bottlenecks gradually unwind," Jadwa said on Monday.

But a revaluation would be unlikely because it would "have adverse impact elsewhere in the economy", Jadwa added.

The government has been trying to offset the impact of inflation this year by boosting subsidies, slashing import levies, introducing cost-of-living allowances for state employees and tightening bank lending curbs.

Investors, meanwhile, are maintaining bets that the riyal could rise 2.5% in two years, according to forward rates. Saudi Arabia and four of its neighbours plan to launch a single currency as early as 2010. (Reuters)

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