1

1

E-mail Article

Printer Friendly

Share Article

Saudi rules out revaluation

Saudi Arabia on Wednesday ruled out revaluing its dollar-pegged riyal, quashing speculation it might strengthen its currency that rose to a 21-year high after it held back from matching last week's US interest rate cut.

"We are not considering any change," Central Bank Governor Hamad Saud Al-Sayyari told Reuters in Riyadh when asked whether the world's largest oil exporter might revalue the riyal, pegged to the US currency at the same rate since 1986.
Saudi Arabia, one of five Gulf Arab states with a dollar peg, said last week it would not lower interest rates after a 50 basis-point cut by the US Federal Reserve, fuelling speculation the kingdom might revalue.

The dollar hit a record low against the euro for the fifth trading day in a row on Wednesday.

"Yes, we are concerned if it falls substantially... but this is the market - we have to see it and we have to accept it," Sayyari said of the US currency. He would not be more specific.

Domestic economic needs would underpin monetary policy, Sayyari told reporters earlier, when asked if he would follow the US in a second rate cut.

"Monetary policy remains directed to the needs of the domestic economy... it is not necessary for us to follow a cut in interest rates," he said.

"What's important for us is the development programme... we think stability in the exchange rate and transparency is important for investors," he said.

The riyal weakened to 3.7401 per dollar after Sayyari's comments, which followed a week of buying of the Saudi currency after the central bank governor told Reuters on September 19 there was no need for a change in interest rates.

"Speculators had been feeding on the silence of the central bank... the story is over with the revaluation debate," said John Sfakianakis, chief economist at Saudi Arabia's SABB bank. "Slowly you will see the riyal go back to 3.75," he said.

HSBC Middle East economist Simon Williams said: "Markets necessarily view currency statements from central bank governors with caution, but his comments were categorical and will dampen expectations of change, at least for now."

Still, the 75 basis-point spread with the US Fed funds rate creates a positive carry on a long riyal position. Saudi Arabia's benchmark repo rate is 5.5%.

Speculation in the riyal could persist if the kingdom does not match a possible cut in the US Federal Reserve benchmark rate next month, according to Deutsche Bank economist Caroline Grady.

"The bigger picture has not changed though, in that maintaining the riyal is becoming increasingly costly," Grady said by telephone from London.

"If the interest rate differential widens further you could well see more foreign inflows which, if unsterilised, could quickly push money growth," she said.

Inflation

Sayyari signalled the central bank would intervene to mop up excess riyal liquidity, and stem money supply growth.

"We are willing and able to intervene... to maintain the exchange rate," he told Al Arabiya Television.

He said he was concerned about inflation in the kingdom, which has accelerated as a quadrupling in oil prices since the start of 2002 has fuelled economic growth.

Money supply grew at its fastest pace in almost three years in July, the same month inflation hit a seven-year high of 3.85%.

"We have noticed inflation creeping up of late... the speed of change is a source of concern for us," Sayyari said.

"It raises concern not only because of its high level but also because of the pace of its growth," he told reporters earlier. Higher international food prices were helping drive inflation, he said.

Saudi Arabia, which made record oil and gas revenues of $193.6 billion last year, still relies on the dollar, he said.

"The dollar is the main currency for the kingdom's exports... unlike in other industrialised countries, the current account surplus is the kingdom is generated mainly by exports of a non-renewable commodity," he said. Oil is priced in dollars.

"The relationship between the riyal and the dollar is not rigid... there is a good margin for manoeuvre," he said, without elaborating.

No Comments