Central bank governor Fahad Al Mubarak said Saudi Arabia will stick with its currency peg as long as oil underpins the economy, dismissing speculation that the country’s currency system is coming under pressure.
Investors have increased bets that Saudi Arabia and others in the region will be next to drop their pegs after China devalued the yuan and Kazakhstan allowed its currency to float. One-year forward contracts for the Saudi riyal, an indicator of where investors expect it to trade, are near the highest since 2003.
“Looking at our economy now, in the near future and for may years to come, oil will be dominant in our economy so keeping the peg will be our policy,” Mr Al Mubarak said in Ankara, where he attended the G20 meeting of global finance chiefs. “Stability is very important to the Saudi government, to Saudi investors and international investors.”
The peg of 3.75 riyals to the dollar has “served our economy well” for more than three decades and recent volatility in the forwards market reflected speculation, he said. “Definitely we’re solid and confident that this is a good policy for our exchange rate,” Mr Al Mubarak said.
The governor said he expects the economy to expand more than 3 per cent this year, exceeding the 2.8 per cent median estimate in a Bloomberg survey. That will help the budget deficit better the IMF’s forecast of a gap equal to 20 per cent of economic output, he said.
“We’re confident that our economy will continue to grow,” especially in the private and oil industries, said the former Morgan Stanley banker.
Saudi Arabia’s non-oil business activity accelerated to a five-month high in August, according to the Emirates NBD and Markit Economics Purchasing Managers Index.
Mr Al Mubarak’s comments may reassure investors rattled by the 50 per cent drop in Brent crude prices over the past 12 months and the dive in emerging-market stocks after China’s surprise decision to revalue the yuan. Saudi Arabia’s benchmark Tadawul All Share Index for equities has declined about 34 per cent over the past year, compared with a 28 per cent drop in the MSCI Emerging Market Index.
“I am not concerned,” Mr Al Mubarak said when asked about the drop in the kingdom’s equity market. “Saudi Arabia isn’t immune from international markets. We’ve seen it in the currency forwards market, in the stock market. It went down and rebounded. We’re part of the global system.”
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