World Economy

Cheaper Saudi Riyal Could Be Explosive

Cheaper Saudi Riyal Could Be ExplosiveCheaper Saudi Riyal Could Be Explosive

A devaluation of Saudi Arabia's currency could cause such political instability that Riyadh has little choice but to stick to its promise to use vast foreign exchange reserves to defend the riyal's 30-year-old peg to the US dollar.

Currency traders have been betting against the Saudi peg, and those of other regional oil producers, in the wake of oil's price collapse, Reuters reported.

Societe Generale said on Thursday it saw at least a 25% chance of a near-term devaluation or 40% if oil prices stay at current levels throughout 2016.

But in Saudi Arabia's largely dollar-denominated economy breaking the peg would immediately raise the price of goods, hitting living standards.

Combined with other pending painful economic reforms, this could lead to unrest in a country where the unwritten social contract swaps citizens' obedience and allegiance to the king for good government services and a share in oil wealth.

"Devaluation of the currency or depegging would self-inflict destructive economic pain. It would be catastrophic," said John Sfakianakis, a Riyadh-based economist.

Some diplomats living in Saudi Arabia say privately that a break in the peg is the single biggest political risk facing a country already embroiled in a war in Yemen and suffering periodic deadly attacks by militants.

The biggest Arab economy has only a small manufacturing base and almost all goods come at dollar-priced imports, so a cheaper riyal would instantly make normal Saudis feel poorer without providing any benefit to the wide economy via cheaper exports.



Saudi citizens have so far been mostly insulated from the impact of lower oil prices. The cost of fuel is cheap, even after a 50% rise in petrol prices, and the cuts in spending have yet to be felt in employment.

But change is coming. Riyadh promised in its 2016 budget statement to slow increases in the state payroll, meaning few new government jobs, and as Saudi private sector growth closely tracks government spending, this means few private sector jobs.

The impact of a sudden rise in living costs and a collapse in purchasing power in such circumstances from a devaluation could be explosive.

"Especially at this time, because of the difficult reforms coming down the road, it would be very hard to sell to the public," said Jamal Khashoggi, head of Al-Arab news channel.

The Saudi Arabian Monetary Agency, the central bank, has vowed to maintain the peg of SR3.75 to the dollar come what may.

With access to $609 billion of foreign exchange reserves built up during years of higher oil prices, it has a way to go until these are exhausted.