Saudi Prince Al Waleed Bin Talal Image Credit: Bloomberg

New York/Dubai: Saudi Prince Al Waleed Bin Talal raised the possibility that the kingdom may depeg its currency as the country undergoes unprecedented social, political and financial change.

“As a last resort maybe some time two, three years down the line it’s a possibility,” Al Waleed, speaking in an interview with Bloomberg TV, said of a potential change to the riyal’s fixed valuation against the dollar.

“Meanwhile, it should stay where it is right now. There are so many things happening.”

Saudi officials have repeatedly sought to reject speculation on maintaining the currency’s peg to the dollar as the country battles slowing growth and slumping oil income.

Central Bank Governor Ahmad Alkholifey earlier this week reiterated the commitment to maintaining the peg.

The world’s biggest oil exporter halted payments to contractors last year as it sought to rein in a budget deficit that reached about 15 per cent of gross domestic product.

Authorities also have introduced a package of austerity measures, including cuts to public-sector wages and energy subsidies.

Economic growth is expected to slow to 1.3 per cent this year, according to a Bloomberg survey of economists, the lowest level since the 2009 global recession.

Oil dependence

The currency has been fixed at about the same rate since the 1980s. Since its introduction, the riyal’s 3.75-per dollar peg has been instrumental in shielding the economy from the volatility of oil and natural gas.

Saudi Arabia is working to reduce the Middle East’s biggest economy’s reliance on oil, which provides three-quarters of government revenue, as part of a plan for the biggest economic shake-up since the country’s founding.

As the government seeks to navigate the worst economic slowdown since the global financial crisis, speculation has mounted this year that the world’s biggest oil exporter won’t be able to maintain the riyal’s peg to the dollar as revenue plunges. Hedge funds such as PointState Capital and Pershing Square Capital Management have wagered that the fixed rate will be dropped.

“It’s the first time any policymaker in the kingdom has even raised the prospect of de-pegging, and that’s significant,” according to Neil Shearing, chief emerging markets economist at Capital Economics Ltd. in New York. “But the message for the next year or so is still steady as she goes — signs point to keeping the peg in place.”

Policy link

A fixed exchange rate helps the central bank accumulate foreign reserves when oil prices rise and avoid squandering the windfalls that anchor investor confidence during economic downturns. It also helps cap long-term inflation by effectively linking monetary policy to that of the US.

Saudi Arabia has made several attempts to stamp out currency products that allow speculators to bet against the peg over the past year. The Saudi Arabian Monetary Agency (Sama), the country’s central bank, ordered banks to stop selling options contracts on riyal forwards in January, people with knowledge of the matter said at the time. In June, it sent a circular to banks banning dollar-riyal forward structured contracts that allowed speculators to bet on a devaluation.

The country can still influence energy prices, become more rigorous with capital controls, or tap its more than $500 billion in foreign reserves to defend the riyal’s peg if needed, said Michael Bolliger, head of emerging market asset allocation at UBS Wealth Management, which oversees the investment strategy for $2.1 trillion in assets.

“If in four or five years the Saudi economy is indeed more diversified, suddenly a pegged currency might no longer be the prevailing choice for a Saudi policymaker,” Bolliger said. “Having a floating exchange rate might be a more interesting proposition for the economic framework — that’s something we have to monitor, along with energy prices, that can change this equation in a meaningful way.”