Dollar peg to stay with oil dependency: Al-Jasser
By KHALIL HANWARE | ARAB NEWS
Published: Apr 26, 2011 00:15 Updated: Apr 26, 2011 14:53
JEDDAH: Saudi Arabia will keep pegging its riyal currency to the US dollar as long as its economy will remain heavily reliant on oil, Saudi Arabian Monetary Agency (SAMA) Gov. Muhammad Al-Jasser said on Monday.
Asked whether the greenback link is to stay forever, Reuters quoted Al-Jasser as saying at a university event in Jeddah: "Nothing is forever in the economy, if the circumstances change, for example if oil becomes 10 or 15 percent of the economy and we have an agriculture, industry and services-based economy, ... then there must be a change in the outlook."
"But as long as the economy is highly dependent on one product, which is oil, then the dollar remains," he said.
Al-Jasser was speaking at a ceremony in Effat University to mark the establishment of a deanship for higher studies and scientific research.
Saudi Arabia pegs its riyal currency to the US dollar based on pure economic interests and government plans to build more housing should reduce inflationary pressures in the future, he added.
"It is noteworthy to point out that the decision to peg the exchange rate of the riyal to the dollar is based on pure economic interests. That is due to the pricing of oil in the dollar and because most of our imports are in dollars," Al-Jasser said. "It is expected that the king's orders to increase housing supply will decrease some of the inflationary pressures resulting from rents in the future," he added.
"Given the current export dynamics of the Saudi economy and its dependence on oil exports as the single most important source of revenue, the logic of revaluing is simply illogical at this point. A revaluation today would lead to an unnecessary loss of revenue when those dollar revenues are converted to riyals. It does not make any sense to revalue today and to devalue a bit later," John Sfakianakis, chief economist at Banque Saudi Fransi, said.
"Saudi Arabia's currency history is known for its continuity and stability. If and when the US economy and its currency change structurally then it should consider its national interest and options," Sfakianakis added.
The Saudi riyal has been effectively pegged at 3.75 riyals to the US dollar since 1986. The peg was introduced with the aim of stabilizing the internal and external value of the currency.
The Riyadh-based Jadwa Investment said in its research earlier that oil market developments have occasionally led to pressure on the peg. In 1993 falling oil prices, combined with concerns about the budget and current account deficits, generated money market speculation that the riyal would be devalued. Similar speculation occurred during late 1998 and early 1999 owing to a combination of falling oil prices and an economic crisis in Asia that caused major exchange rate devaluations in that region. At that time, SAMA successfully intervened in the foreign exchange markets with its vast foreign asset position to maintain the stability of the riyal.
However, Jarmo T. Kotilaine, chief economist at the National Commercial Bank, said: "The Saudi economy, in spite of years of deliberate diversification, remains in essence an oil-based economy. In an environment where oil is priced in US dollars, there is no compelling rationale to replace the current dollar peg in the near term. It has served the economy well and endured through periods of instability, thereby highlighting the credibility of SAMA's position. Nor is a departure from the dollar peg in practice realistic until and unless the Saudi financial market develop a degree of depth and sophistication that will enable interested parties to reasonably deal with a different exchange rate regime."
But as obvious as the case for the dollar peg remains for now, it is increasingly obvious that a number of global trends are potentially taking us toward a situation where the international role of the dollar will no longer be that of the dominant global reserve currency. The leading emerging economies are committed to increasing the internationalization of their currencies as their weight in the global economy increases. This, along with the changing demand trends, may over time weaken the case for denominating key commodities in US dollars. Moreover, the debate about establishing a new global currency regime will be amplified by the mounting anxiety about the credibility of US and European economic policy. While there is no obvious near-term alternative to the dollar, we are on current projections looking at a very gradual but probably fairly steady transition toward a more multi-polar currency system where the relative standing of the dollar is eroded over time. The end result may well be a new global reserve currency or currencies.
Realistically speaking, Kotilaine said, as acute as some of concerns and frustrations of many market participants and policy makers are, I do not see the current situation changing much for a number of years. Nonetheless, the probability of it changing within the coming decade now looks markedly greater than it did even just a year or two ago, something that will create new challenges for Saudi Arabia and the Gulf as well. But more important than any discussion of a new exchange regime are continued efforts to develop the national and regional financial markets. This will over time increase the policy options available to the authorities.
While talking about Kingdom's spending plan, Kotilaine said: "It is likely that the allocation of new resources to housing, as well as the adoption of the mortgage law, will over time help resolve some of the structural imbalances and bottlenecks in the housing market, thereby reducing the contribution of housing to inflation. However, the transition will likely be gradual, albeit from a starting point where the rate of rental inflation has come down fairly markedly as it is. As necessary as new investment in housing is, it will have to be accompanied by careful regulation to contain speculation and the kind of frenzy that some regional markets have seen during the past decade." He said a failure to do so, in an environment of loose fiscal policy and increasing liquidity, may well reduce or even reverse the disinflationary impact of some of the new policies.
On inflation, Paul Gamble, head of research at Jadwa Investment, said: "An increase in supply of housing of the size outlined in the Royal decrees will definitely cause a reduction in rental inflation over the medium term as the new supply reaches the market. It could have a short-term impact as well, if the prospect of new housing discourages some people from entering the property market and encourages others currently looking for property to postpone their search."
THIS COMMENT WAS POSTED AFTER THIS ARTICLE:
REX
Apr 26, 2011 13:15
It is ironic to to hear their reasoning that it helps their national economy when riyal is peg to the dollar because their economy is heavily oil-dependent but no one says when in fact their local economy is also much more dependent on imported products such as food and construction materials. Ordinary citizens complain of price increases of almost products including housing which most traders import thus the price inreases because riyal is peg with a depreciating dollar plus transportation costs. If they continue with their policy i will not be surprise if the current prices of products will be doubled after 5 years.
By KHALIL HANWARE | ARAB NEWS
Published: Apr 26, 2011 00:15 Updated: Apr 26, 2011 14:53
JEDDAH: Saudi Arabia will keep pegging its riyal currency to the US dollar as long as its economy will remain heavily reliant on oil, Saudi Arabian Monetary Agency (SAMA) Gov. Muhammad Al-Jasser said on Monday.
Asked whether the greenback link is to stay forever, Reuters quoted Al-Jasser as saying at a university event in Jeddah: "Nothing is forever in the economy, if the circumstances change, for example if oil becomes 10 or 15 percent of the economy and we have an agriculture, industry and services-based economy, ... then there must be a change in the outlook."
"But as long as the economy is highly dependent on one product, which is oil, then the dollar remains," he said.
Al-Jasser was speaking at a ceremony in Effat University to mark the establishment of a deanship for higher studies and scientific research.
Saudi Arabia pegs its riyal currency to the US dollar based on pure economic interests and government plans to build more housing should reduce inflationary pressures in the future, he added.
"It is noteworthy to point out that the decision to peg the exchange rate of the riyal to the dollar is based on pure economic interests. That is due to the pricing of oil in the dollar and because most of our imports are in dollars," Al-Jasser said. "It is expected that the king's orders to increase housing supply will decrease some of the inflationary pressures resulting from rents in the future," he added.
"Given the current export dynamics of the Saudi economy and its dependence on oil exports as the single most important source of revenue, the logic of revaluing is simply illogical at this point. A revaluation today would lead to an unnecessary loss of revenue when those dollar revenues are converted to riyals. It does not make any sense to revalue today and to devalue a bit later," John Sfakianakis, chief economist at Banque Saudi Fransi, said.
"Saudi Arabia's currency history is known for its continuity and stability. If and when the US economy and its currency change structurally then it should consider its national interest and options," Sfakianakis added.
The Saudi riyal has been effectively pegged at 3.75 riyals to the US dollar since 1986. The peg was introduced with the aim of stabilizing the internal and external value of the currency.
The Riyadh-based Jadwa Investment said in its research earlier that oil market developments have occasionally led to pressure on the peg. In 1993 falling oil prices, combined with concerns about the budget and current account deficits, generated money market speculation that the riyal would be devalued. Similar speculation occurred during late 1998 and early 1999 owing to a combination of falling oil prices and an economic crisis in Asia that caused major exchange rate devaluations in that region. At that time, SAMA successfully intervened in the foreign exchange markets with its vast foreign asset position to maintain the stability of the riyal.
However, Jarmo T. Kotilaine, chief economist at the National Commercial Bank, said: "The Saudi economy, in spite of years of deliberate diversification, remains in essence an oil-based economy. In an environment where oil is priced in US dollars, there is no compelling rationale to replace the current dollar peg in the near term. It has served the economy well and endured through periods of instability, thereby highlighting the credibility of SAMA's position. Nor is a departure from the dollar peg in practice realistic until and unless the Saudi financial market develop a degree of depth and sophistication that will enable interested parties to reasonably deal with a different exchange rate regime."
But as obvious as the case for the dollar peg remains for now, it is increasingly obvious that a number of global trends are potentially taking us toward a situation where the international role of the dollar will no longer be that of the dominant global reserve currency. The leading emerging economies are committed to increasing the internationalization of their currencies as their weight in the global economy increases. This, along with the changing demand trends, may over time weaken the case for denominating key commodities in US dollars. Moreover, the debate about establishing a new global currency regime will be amplified by the mounting anxiety about the credibility of US and European economic policy. While there is no obvious near-term alternative to the dollar, we are on current projections looking at a very gradual but probably fairly steady transition toward a more multi-polar currency system where the relative standing of the dollar is eroded over time. The end result may well be a new global reserve currency or currencies.
Realistically speaking, Kotilaine said, as acute as some of concerns and frustrations of many market participants and policy makers are, I do not see the current situation changing much for a number of years. Nonetheless, the probability of it changing within the coming decade now looks markedly greater than it did even just a year or two ago, something that will create new challenges for Saudi Arabia and the Gulf as well. But more important than any discussion of a new exchange regime are continued efforts to develop the national and regional financial markets. This will over time increase the policy options available to the authorities.
While talking about Kingdom's spending plan, Kotilaine said: "It is likely that the allocation of new resources to housing, as well as the adoption of the mortgage law, will over time help resolve some of the structural imbalances and bottlenecks in the housing market, thereby reducing the contribution of housing to inflation. However, the transition will likely be gradual, albeit from a starting point where the rate of rental inflation has come down fairly markedly as it is. As necessary as new investment in housing is, it will have to be accompanied by careful regulation to contain speculation and the kind of frenzy that some regional markets have seen during the past decade." He said a failure to do so, in an environment of loose fiscal policy and increasing liquidity, may well reduce or even reverse the disinflationary impact of some of the new policies.
On inflation, Paul Gamble, head of research at Jadwa Investment, said: "An increase in supply of housing of the size outlined in the Royal decrees will definitely cause a reduction in rental inflation over the medium term as the new supply reaches the market. It could have a short-term impact as well, if the prospect of new housing discourages some people from entering the property market and encourages others currently looking for property to postpone their search."
THIS COMMENT WAS POSTED AFTER THIS ARTICLE:
REX
Apr 26, 2011 13:15
It is ironic to to hear their reasoning that it helps their national economy when riyal is peg to the dollar because their economy is heavily oil-dependent but no one says when in fact their local economy is also much more dependent on imported products such as food and construction materials. Ordinary citizens complain of price increases of almost products including housing which most traders import thus the price inreases because riyal is peg with a depreciating dollar plus transportation costs. If they continue with their policy i will not be surprise if the current prices of products will be doubled after 5 years.