Twelve-month forward contracts on Oman's rial almost tripled to an all-time high of 2,000 points on Monday
The rout in oil prices is throwing the decades-old currency pegs of the Gulf Arab region back under the microscope.
Twelve-month forward contracts on Saudi Arabia’s riyal climbed fourfold to 180 points in the offshore market Monday as the slide in crude following the collapse of the OPEC+ production agreement sent global markets into turmoil.
While that’s a long way from the all-time high of 1,000 points reached in 2016, there was a more worrying jump for Oman’s forwards - they almost tripled to an all-time high of 2,000 points.
The increase shows how the prospect of declining dollar earnings for the energy-exporting nations of the Gulf makes it more difficult for governments to balance their budgets, pressuring the systems under which they keep their currencies pegged to the dollar.
“What we are seeing now is the initial shock based on oil prices,” said Saed Abu Karsh, the co-founder of Dubai-based hedge fund Ark Capital Management.
“The market is dislocated. I don’t think there is an immediate risk to the peg, but the risk is for further pressure on the forwards.”
While the balance sheets of the six members of the oil-rich Gulf Cooperation Council is weaker than in recent years, public debt is higher and foreign reserves are lower, prices will need to remain depressed for longer for pegs to come under sustained pressure, according to Ziad Daoud, the Dubai-based chief Middle East economist for Bloomberg Economics.
“Many countries can sustain their exchange-rate regimes for a number of years,” he said.
Oman’s peg may be the most vulnerable because it has less firepower to protect the rial, according to analysts. The sultanate’s weakening finances prompted Moody’s Investors Service to downgrade its debt rating deeper into junk to Ba2 on Thursday. And that was before oil’s latest plunge.