Riyadh: Saudi Arabian banks are under orders to stop selling currency products that allow investors to make cheap bets on a devaluation of the riyal, according to five people with knowledge of the matter.

The Saudi Arabian Monetary Agency told banks to halt the sale of options contracts on riyal forwards at a meeting in Riyadh on Jan. 18., the people said, asking not to be identified as the information is private. The directive applies to local banks and the Saudi branches of international banks, the people said.

Countries with currencies pegged to the dollar are coming under increasing attacks by traders speculating that it’s become too expensive for policymakers to continue defending exchange rates amid a soaring US dollar and a collapse in commodities. Bets for a devaluation of the riyal reached their highest in almost two decades this month, driving 12-month forward contracts for the riyal to their highest since at least December 1996.

Saudi Arabia pledged on Jan. 11, the second time in four months, to stick with its currency peg. SAMA will “uphold its mandate” of maintaining the riyal at 3.7500 per dollar, Governor Fahad Al-Mubarak said at the time. SAMA declined to comment when contacted Wednesday by telephone.

SAMA’s “motive is to kill this speculative activity over the sustainability of the riyal peg,” Apostolos Bantis, a credit analyst at Commerzbank AG, said by phone from Dubai. “Over time, this measure will lead to an easing of the forwards because it will make it far more risky for investors to do this trade.”

Riyal Forwards

Saudi riyal forwards for the next 12 months rose as high as 880 points on Wednesday. The contracts were unchanged at 850 points as of 11:12am in Riyadh. The nation’s benchmark stock gauge, the Tadawul All Share Index, dropped 3.3 per cent.

“We have observed volatility in the dollar versus riyal forward market due to the mispricing linked to market operators’ misperception about Saudi Arabia’s overall economic backdrop,” Al-Mubarak said.

While Saudi Arabia, the world’s largest oil exporter, has burnt through its foreign reserves, the stockpile, at about $628 billion at the end of November, is still the third largest in the world after China and Japan. The kingdom is cutting spending and subsidies to cope with the decline of oil revenue and may tap debt markets this year to fund a deficit.

“The peg has served Saudi Arabia well,” said Masood Ahmed, director of the Middle East and Central Asia department at the International Monetary Fund said in an interview. “We believe it remains appropriate given the structure of the economy. Also Saudi Arabia has adequate buffers to maintain this peg.”

The IMF lowered its forecast for economic growth in Saudi Arabia Tuesday to its slowest pace since 2002. Growth is expected at 1.2 per cent this year and 1.9 per cent in 2017.

“The new steps to achieve fiscal consolidation will support the exchange rate over the long term,” Ahmed said. “We don’t think that at this stage changing the exchange-rate regime is either appropriate or necessary.”