Will Saudi Arabia Keep A USD Peg If Oil Prices Keep Dropping?
There are indications from Saudi Arabia that it is planning on slashing its state budget deficit via slashing its spending limits and introducing policies that would aid it raise revenues from non-oil sources. The decision is on the backdrop of a dramatic decline in oil prices over the last 18 months that have hit its oil revenues pretty badly.
Analyst are forecasting that the price of crude oil will decline further and Gulf States have begun to feel uneasy. Saudi Arabia ran a negative balance of 367 billion riyals ($97.9 billion) or 15 per cent of GDP for the year ending 2015 and economists at the International Monetary Fund have warned the country in October that it could go out of funds within the next five years unless it embraces radical reform measures.
Revenues for the coming year are predicted to reach 514 billion riyals, a drop from 608 billion riyals in revenues for the year 2015. Saudi Arabia’s currency has been pegged to the U.S. dollar since 1986 and this has helped the country gain a certain level of credibility and steadiness. At the moment, analysts are beginning to question if Saudi Arabia could abandon its currency peg policy versus the U.S. dollar.
The drastic dip in crude oil prices and the strong dollar have made the peg policy an unsmart move and authorities in Riyadh have continued to use its foreign exchange reserves to prop up its budget and back the peg. Crude oil is denominated in U.S. dollars and the government of Saudi Arabia relies on the commodity for a large chunk of its revenues.
The former head of asset management at the Saudi central bank (SAMA), Khalid Alsweilem, was quoted in the Telegraph as saying that the Saudi authorities do not have strong enough reserves to pad losses suffered from lower oil prices that have stayed for too long and that “if the reserves keep going down as they are now, they will not be able to keep the peg.”
In other news, some sources who are in the know, are claiming that the apex bank in China has temporarily halted some foreign exchange businesses of several non-local banks until sometime in March 2016. Some of the services that were suspended includes the liquidation of spot positions for customers and a couple of other welfares linked to cross-border, offshore and onshore businesses.
Three banks that were affected have been notified by the People’s Bank of China, but have not been made public and PBOC have made no further comments on this when contacted.
These measure are in line with various steps that have been taken by authorities in China to keep the Yuan stable and stem capital outflow due to the recent depreciation that is facing the Yuan following the devaluation in August.
There have been a widening in Spread between the onshore and offshore markets for the renminbi, or yuan following its devaluation, hence making it quite difficult for the apex bank to control its currency and curtail an outflow of capital from the world’s second largest economy, that is current in the face of its slowest growth in 25- years.
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