Will Saudi Arabia devalue its currency against the dollar?

The fall in Saudi oil prices is likely to push the value of its riyal currency into the future, according to a US World View Stratfor report.

Writer Greg Brady says that the current crisis of oil price collapse has led to the return of questions about the continuity of the state of correlation between the US and Saudi currencies.

Despite the economic shock caused by the outbreak of the Corona virus, this association is expected to continue in the near term, but the structural changes in the global oil market and in the Saudi economy indicate that Riyadh will likely devalue its currency at a time What during the next five years.

In my opinion, Saudi Arabia will find itself compelled not to rely on the recovery of oil markets and the return of its exports to its previous level, in order to be able to re-mobilize its foreign exchange resources that enable it to maintain the continuity of the currency and its link to the dollar.

He explains that over many decades, pegging the local currency to the dollar was a beneficial step for Riyadh and other oil-rich Gulf countries, given the US currency’s pricing in most of the oil trade deals.

The writer notes that the main benefit of the currency peg system is to achieve stability even in periods of inflation, and to create a safe environment in which the risks of currency exchange change are limited for foreign companies. It also protects domestic consumers from fluctuations in the prices of imported materials.

However, the system of currency pegging - but my post - means giving up the independence of monetary policy.

As for Riyadh, this problem has always been overlooked, because most Saudi citizens work in the public sector, while foreigners are brought in to work in the private sector.

The author said that the effectiveness of relying on foreign employment adjustment as a substitute for the independence of financial policy has become less effective now, as in the past the Saudi government was able to control the pressures of inflation in times of strong growth, by issuing more work visit visas, as The competitiveness of non-oil exports and domestic industries was previously a catalyst, but in the future the value of the Saudi currency due to its peg to the dollar will be exaggerated as a factor that does not encourage investment in local industries.

 OPEC Plus

In addition to that - my mail continues - Saudi Arabia can no longer rely on the OPEC Plus agreement to base crude oil prices and keep them above the rate necessary to reduce the deficit in its trade balance and allow it to refill its financial resources.

Also, Saudi Arabia's attempts to adapt to a future in which demand for oil rises and then gradually decreases, which is also something that changes the structure of the Saudi economy and makes the linking of the riyal to the dollar difficult.

The writer considers that Saudi Arabia is now in urgent need to stop inflating the wages of public sector employees, and transfer local labor to the private sector to be more productive, in order to succeed in its economic plans. This step will be necessary despite the fact that Saudi citizens prefer to work in government jobs, and the state will need to provide financial support to private companies to encourage them to employ Saudis, in this period in which the Corona virus caused many foreigners to travel to their countries.

In the end, some of the devaluations of the Saudi riyal - albeit modestly - can help reduce the weight of public sector wages, if this coincides with a decline in dependence on foreign workers with the exception of some highly skilled jobs, as the author explains.

 Warning

The writer warned that the process of linking the Saudi riyal to the US dollar is also about to undermine the value of Saudi exports, and that overestimating the value of this currency will negatively affect the tourism sector in the Kingdom, which is one of the most important non-oil resources in this country, as Making Saudi Arabia a more expensive destination, will disrupt its projects to develop tourism, which is one of the main options for diversifying financial resources within the framework of the Vision 2030 plan.

The writer stated that defending the current link between the riyal and the dollar has cost Saudi Arabia dearly in recent months, as its foreign exchange reserves reached their peak in August 2019, at the level of $ 746 billion, but these stocks fell by the end of April to 444 Billion, due to lower oil prices and the Corona Virus crisis.