Saudi Arabia’s foreign exchange reserves can sustain its currency’s peg to the dollar despite pressure from China devaluing the renminbi, says a leading economist.
The prediction from Manolis Davradakis, senior economist at Axa Investment Managers, comes amid widespread speculation that the Saudi riyal is too expensive in light of China’s depreciation and the falling oil price.
One-year dollar forwards have risen over the past five years, particularly for the Saudi riyal, due to declining foreign exchange reserves resulting from low oil prices and currency overvaluation. Saudi Arabia gets nearly a quarter of its imports from China.
However, Davradakis says Saudi Arabia’s strong investment position – with enough reserves to finance almost three years worth of imports – will allow it to maintain the dollar peg.
“Saudi Arabia can sustain the peg for as long as its aspirations dictate,” he says.
Davradakis adds that there are good reasons for the Saudi authorities to avoid devaluing the riyal, as this would cause higher inflation and test socio-political stability.
Other Gulf countries are also under pressure to unpeg their currencies from the dollar. Wael Ziada, head of research at EFG Hermes, says that in coming months, “the currency peg will be put to the test”.
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