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Sat 21 Nov 2015 01:46 AM

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Saudi riyal hits 12-year low in one-year forwards market

Saudi riyal hit its lowest against the dollar in 12 years as falling oil prices exert fresh pressure on the pegged currency

Saudi riyal hits 12-year low in one-year forwards market
Saudi money, Saudi currency, Saudi economy, Saudi finance, GCC currencies

The Saudi riyal hit its lowest against the dollar in more than 12 years on Friday in the one-year forwards market as falling oil prices exert fresh pressure on the pegged currency.

The riyal is pegged to the dollar at around 3.75 and authorities have pledged to preserve the three-decade old link despite hardships caused by oil's price slump and the dollar's broad strength as investors prepare for a lift-off in US interest rates.

One-year dollar/riyal forwards rose 4.25 basis points pricing the Saudi currency around 3.793/3.799 in a year's time, and implying depreciation for the 3.75 spot rate.

"Do I believe in disruption of the peg? No, at least not in 2016. But pressure on local banks is definitely on and the epicentre is the oil price," said Luis Costa, head of CEEMEA FX and debt strategy at Citi. "The tough situation with hard currency liquidity is driving up the forward points."

With over half a trillion dollars in reserves, Riyadh has ammunition enough to avoid dumping the peg as some other oil exporters such as Kazakhstan have been forced to do.

But with the oil shock, a budget deficit that may top $100 billion this year and an expensive currency, Saudi Arabia could "buckle" in coming years, delegates at the Reuters investment outlook summit warned this week.

The International Monetary Fund has warned the kingdom could run out of cash reserves in less than five years.

Dollar/riyal forwards have risen since the oil slide began last June and spiked in August when China devalued its currency. With oil again headed lower, they are rallying again.

Analysts at Scotiabank noted a $75 billion fall in reserves from August highs above $700 billion and Saudi's need for a $100 per barrel oil price to fund its budget. The repercussions of a weaker riyal would be wide-ranging they said.

"Given the durability of the peg, a devaluation be a shock and would likely spill over into the likes of the Canadian dollar and Norwegian crown," Scotiabank told clients, referring to the currencies of other oil producers.

Both those currencies have dropped around 15 percent this year against the dollar.