Saudi Arabia has moved to damp speculation on its currency by barring domestic banks from dealing in forward contracts on the riyal as the kingdom seeks to shield its economy from the impact of the oil price plunge.
Bankers said the Saudi Arabian Monetary Authority had told lenders to refrain from engaging in trades on riyal forward options, which have come under intense pressure as traders bet that the oil-dependent kingdom’s fiscal strains will trigger a departure from decades of pegging the riyal to the US dollar.
“Foreigners need a local counterparty for these trades,” one Saudi banker said. “And Sama wants to stop them, so they asked local banks to suspend this (business.)”
Sama, which has repeated its commitment to the peg, hopes to staunch speculation by removing the Saudi counterparties required for the majority of these trades, the banker added.
However, the intervention is stoking unease about the government’s ability to manage the economy in the face of vastly reduced oil revenues. “This is bringing in uncertainty where there was supposed to be none,” said a Dubai-based banker.
Traders have been betting that the government will devalue the riyal to ease the fiscal strain that has been felt since oil prices, now at 12-year lows, collapsed 18 months ago.
Riyadh helped trigger the slide when it refused to cut its oil production in a bid to maintain its market share and edge out low-cost producers, such as shale.
Gulf oil exporters face a sharp economic slowdown this year as austerity measures threaten recession in Saudi Arabia, Oman and Bahrain, according to a report published by HSBC this week.
“Fifteen months into the region’s worst terms of trade shock in a generation, the pain is still getting worse,” HSBC said.
The IMF this week downgraded its October estimate for the Saudi economy in 2016 by one percentage point to just 1.2 per cent. In 2015 it grew 3.4 per cent.
The triple threat of global economic uncertainty, spending cuts and tight bank liquidity — aggravated by US rate increases — is also unsettling regional business confidence. Added to this are renewed regional tensions between Riyadh and Tehran. Regional stock exchanges have suffered further sell-offs. The Saudi bourse has dropped 21 per cent this month and is 51 per cent down on its 2014 peak.
“We knew that 2016 was going to be bad, but we didn’t expect it all to come in the first three weeks,” said one Dubai-based market analyst.
The latest business data for Saudi and the UAE shows a sharp slowdown in managers’ confidence about the economic outlook during the last quarter of 2015, hitting multiyear lows this month.
“Unless a rally in oil prices comes to the rescue, our expectation is that this downturn in activity will deepen,” HSBC said.
As well as spending less, HSCB said governments would borrow more from local banks, putting upward pressure on rates as Gulf governments raise interest rates in line with the US just as “the region’s own worsening economic conditions would otherwise call for cuts.”
While devaluation of the riyal would bring in short-term financial gain, HSBC argues that this would not be worth overturning the three decades of stability that the peg has delivered.
“That credibility would be spent if the peg were to move now, robbing the domestic economy of its only anchor at a time when it faces its most pronounced strains in a generation,” the bank said.
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