Saudi riyal peg not under threat – Credit Suisse

Swiss bank Credit Suisse had dismissed concerns of a potential devaluation of the Saudi riyal.

In a report, the bank said Saudi’s foreign exchange reserves, at $550bn, were 15 per cent lower year-on-year and 23 per cent lower than their mid 2014 peak.

However, it said they were still close to 100 per cent of GDP and would provide an adequate cushion to defend the currency’s SAR3.75 peg to the US dollar.

Credit Suisse also noted that the foreign exchange reserves figures did not include visible US treasuries – totalling $96bn and believed to be significantly higher due to external managers.

“We believe concerns about the peg are misplaced and that the risk of devaluation is negligible. First, the political and economic costs are far too high. A devalued riyal would certainly reduce fiscal deficit, but at the cost of significantly higher imported inflation,” it said.

“Keeping consumer prices under control has always been a priority in Saudi Arabia and has become all the more so since the Arab Spring. We would therefore expect the government to avoid any policy that could result in basic necessities becoming materially more expensive.”

The bank said devaluation could destabilise the country’s financial framework and by extension the wider Gulf region with the possibility of significant capital flight as a worst-case scenario.

Economic concerns have pressured the riyal’s peg to the US dollar this year, with announcements of far-reaching reforms reducing but not eliminating speculative calls against it.

The kingdom has one of the lowest debt-to-GDP ratios in the world but is expected to hit a 10-year high of 17 per cent when it issues its first international bond, expected to be worth $15bn.

Read: Landmark Saudi bond takes step forward

Credit Suisse forecast Saudi debt-to-GDP would approach 50 per cent by 2020 or 2021 with further debt issuances expected