DUBAI: The Saudi Arabian riyal hit a record low in the forwards market on Tuesday, breaching the key 1000-point mark as a fresh slip in oil prices raised fears that the kingdom will eventually scrap or loosen its currency peg to the US dollar.
One-year dollar/riyal forwards contracts used by counterparties to lock in a future exchange rate climbed as high as 1020 points in very volatile trade. This topped their previous record of 850 points hit during a bout of speculation against the riyal in 1999, according to Thomson Reuters data.
The move has come despite comments from Saudi Arabia’s central bank governor on Monday that recent volatility in the forwards market is due to speculation based on unrealistic expectations. He restated policy makers’ commitment to the peg.
“Forwards are moving higher on speculation that Saudi Arabia may soon have to either abandon, or at the very least loosen its currency’s peg to the dollar, as its reserves will dramatically fall if oil prices continue to slide further,” said a currency trader at a major Gulf bank.
The riyal is pegged in the spot market at 3.75 to the dollar. Some banks and funds use the forwards market to hedge against the risk that the peg might eventually be broken.
Persistently low oil prices have raised fears that the world’s top oil exporter may have to run down its foreign assets still totaling $628 billion at the end of December at a much faster rate than the $100 billion used in 2015 to cover a record state budget deficit, forecast for this year to be 326 billion riyals.
The low crude prices have inflicted much pain on the kingdom’s petroleum industry, which in 2015 generated some 80 per cent of government revenues. Fuelling speculation further are geo-political concerns over a sharp deterioration in relations between Saudi Arabia and Iran in recent days, which is seen likely to continue.
Despite the bleak forecast for oil prices and geopolitics, many bankers still believe Riyadh remains very unlikely to break its currency peg.
Courtesy : Dawn News