Oil-rich countries in the Gulf Cooperation Council are unlikely to abandon their decades-old currency pegs to the US dollar even as a slump in oil prices puts a $250bn squeeze on the region’s finances, according to Moody’s Investors Service.
“The GCC’s large foreign-currency reserves provide ample room to maintain pegged exchange-rate regimes for several years, even in an adverse oil price scenario,” senior analyst Mathias Angonin said at a press briefing in Dubai yesterday. “Changes to the current exchange-rate regimes are unlikely because the costs associated with one-off devaluations would outweigh the benefits.”
Hedge funds such as Zach Schreiber’s PointState Capital and Knighthead Capital Management are among those that have been using derivatives including forward contracts to bet that countries such as Saudi Arabia will be forced to abandon their currency pegs and devalue the riyal, people with knowledge of the matter said earlier this month. Moody’s put credit ratings of five of the six GCC nations on review for a cut earlier this month, citing the shock of depressed oil prices on these economies.
Gulf states are expected to have a combined fiscal deficit of about $250bn over the next two years, which is expected to be financed by a draw-down of currency reserves and less than half in borrowing, according to Angonin.
Saudi Arabia is looking for other sources of funding to plug a budget deficit that is expected to reach 17.8% of economic output this year, according to Riyadh-based Jadwa Investment Co. So far, the government has mostly relied on a domestic bond programme and drawing down foreign reserves held by the central bank. It raised 98bn riyals ($26bn) from selling bonds to local institutions last year, and will probably sell about 120bn riyals of debt in 2016, Saudi Fransi Capital said in October.
The Saudi Arabian Monetary Agency has repeatedly said it will stick with its currency peg. In a bid to curb speculation, the agency in January ordered banks in the kingdom to stop offering options contracts on riyal forwards to their clients, five people with knowledge of the matter said at the time.
Currency depegging would raise uncertainty about the prices of imported goods in the region, adding to inflationary pressures, according to Moody’s. Fiscal and trade gains brought with depegging would be limited, the ratings firm said.
While large one-off devaluations would increase the local-currency equivalent of oil revenues in dollars, it would also increase the cost of foreign-currency-denominated government expenditures, partially offsetting fiscal benefits, Moody’s said.
Oil slumped to a 12-year low this year before rising on speculation that stronger demand and falling US output will ease a global surplus.