Petro-economies with flexible exchange rates have already seen double-digit declines in the value of their currencies over the past year, in percentage terms. But with crude now at 11-year lows, pressure is also mounting on a range of currency pegs. The futures contract for the value of the Saudi riyal, which has been pegged to the dollar for three decades, hit a 16-year low. While Saudi Arabia has no plans to ditch its currency peg, at least officially, the markets are starting to bet that the country won’t be able to maintain the peg due to budgetary pressures and dwindling foreign exchange reserves.
Low oil prices have blown a massive hole in the Saudi budget. For now, Saudi Arabia has chosen a path of austerity in order to try to address the problem. It revealed a budget that calls for reforming fuel subsidies, raising taxes, and lower spending. But for a government that is keen to maintain social stability, slashing public expenditures is not really something it can lean on too much.
Related: BP’s CEO Finally Sees Oil Prices Bottoming Out
With its oil market strategy a priority at the moment, ruling out an effort to significantly increase oil prices through production cuts, the only other option to fix its budget deficit is to abandon its currency peg. The Saudi riyal has been pegged at 3.75 to 1 U.S. dollar, but the futures market sees one-year contracts at 3.82, a 16-year high. Commerzbank AG says the peg is no longer sustainable. “Markets clearly no longer believe that the USD-SAR peg is durable,” Peter Kinsella, an analyst at Commerzbank, concluded. “If they did, then forwards would not diverge from spot prices to any large extent.”
…click on the above link to read the rest of the article…
