Saudi riyal forwards on rising trajectory

12-month dollar-riyal forwards rose above 1,000 points for the third time in 30 days.

A Saudi woman shows Saudi riyal banknotes at a money exchange shop, in Riyadh. Faisal Al Nasser / Reuters
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Saudi riyal forwards continued to rise in trading yesterday, indicating that the Saudi Arabian Monetary Agency’s move to shore up its currency has not removed pressure on the kingdom’s currency peg.

Twelve-month dollar-riyal forwards rose above 1,000 points, for the third time in 30 days yesterday. Before December, the cost of buying options had not exceeded 1,000 points since 1996.

Sama told local banks and domestic branches of international banks to stop selling options contracts on forwards on Wednesday. This move was intended to make it harder for investors to bet against the riyal.

“Typically, closing down a forward or options market is a bit like shooting the messenger,” said Michael Klein, a professor of economics at Tufts University, and the author of a recent book on exchange rates. “The market prices are reflecting market sentiments, and are a symptom, rather than a cause, of challenges facing the government.”

Forwards markets allow investors to buy currency in advance of delivery. Currently, investors are paying about 10 per cent premium above the current exchange rate to buy Saudi riyals in a year’s time. That indicates that they expect the value of the riyal to fall within the next 12 months – which is only possible if Saudi Arabia abandons its peg to the dollar.

This comes despite repeated official statements of commitment to the peg.

“I would like to reiterate our official position that Saudi Arabian Monetary Agency will uphold its mandate of maintaining the peg at 3.75 riyals per USD, backed up by the full range of monetary policy instruments including its foreign exchange reserves,” Fahad bin Abdullah Al Mubarak, Sama’s governor, said on January 11.

Saudi Arabia has maintained its peg to the dollar at 3.75 riyals since July 1986.

The kingdom is set to allocate 20 billion riyals (Dh19.56bn) of new debt to domestic bond markets next week, according to reports. Saudi Arabia has tapped local debt markets in a bid to finance its growing fiscal deficits, brought about by the decline in oil. The kingdom ran a fiscal deficit of 15 per cent of GDP last year.

Yesterday the Saudi Shura Council, a consultative assembly, ordered state pension fund the General Organization for Social Insurance to revise its investment plans to generate higher returns, the Saudi Press Agency said in a statement. This follows a McKinsey report that argued that the kingdom could improve its financial lot by adopting new asset management strategies.

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