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Study: Saudi Arabia can avoid any devaluation

Saudi Arabia enjoys one of the lowest debt-to- GDP ratios, which is expected to jump to a 10- year high of 17 percent this year

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Saudi Arabia has enough tools at its disposal to avoid any devaluation in the foreseeable future, Credit Suisse Research on Saudi Arabia released Wednesday revealed.

Foreign exchange reserves are 15 percent lower YoY and 23 percent lower than their mid-2014 peak, but at about $550 billion, the reserves are still close to 100 percent of GDP and provide adequate cushion for defending the peg. This number does not include Saudi Arabia’s holdings of US treasuries totaling $96 billion (down from recent peak of $124 billion in January 2016).

“We believe this number significantly understates Saudi Arabia’s full holdings of treasuries, much of which are likely to be with external managers. The dollar peg also plays an important role in the credibility of the central bank and its monetary policy.”

A devaluation could destabilize the financial framework of the country (and by extension, of the broader Gulf region as well) and, in a worst case scenario, it could trigger significant capital flight.

Pressure on the Saudi riyal’s (SAR) peg to the US dollar has remained well above the long-term average. Even the announcements of far-reaching reforms have only served to reduce but not eliminate speculative calls against the peg. In part, this is due to the low-cost nature of such positioning: downside is limited to 1% at present, while upside could be significant in case of devaluation.

“We believe concerns about the peg are misplaced and that the risk of devaluation is negligible. There are two primary reasons for our conviction. First, the political and economic costs are far too high. A devalued riyal would certainly reduce fiscal deficit, but at the cost of significantly higher imported inflation.” Keeping consumer prices under control has always been a priority in Saudi Arabia and has become all the more so since the Arab Spring. We would therefore expect the government to avoid any policy that could result in basic necessities becoming materially more expensive.

This article first appeared in the Saudi Gazette on Oct. 6, 2016.