JEDDAH, 25 October 2007 — The executive board of directors of the International Monetary Fund (IMF) has said that the Saudi riyal appears to be moderately undervalued at present.
Many directors see this as a transitional phenomenon “reflecting the positive terms-of-trade shock.” Several other directors considered that the riyal is broadly in line with fundamentals.
The IMF directors also considered that the current pegged exchange rate regime has served the economy well, although a few directors were of the view that a more flexible exchange rate would help reduce fluctuations in the face of oil price volatility.
According to a statement issued by the IMF on Tuesday, directors noted the Saudi authorities’ decision to maintain the regime unchanged in the period leading to the monetary union of the Gulf Cooperation Council (GCC) while keeping an open mind about the choice of the exchange rate regime under the prospective monetary union.
Brad Bourland, chief economist and head of research at the Riyadh-based Jadwa Investment, told Arab News: “I agree that the currency is somewhat undervalued but this doesn’t mean it should be changed; an undervalued currency is healthy for the economy.”
He added: “More broadly the economy is enjoying what I refer to as its golden age and this should last for many years to come.”
John Sfakianakis, SABB chief economist, agreed with Bourland’s views. “We continue to believe firmly that the Saudi riyal is not going to be revalued. An expected change in the currency regime will take place only if the dollar weakens at an alarming rate and is sustained over the medium term.”
Sfakianakis said: “The Kingdom’s competitive advantage, in petrochemical exports for example, is not being affected, as most are priced in dollars.”
He added: “Currency stability plays an important part in attracting much-needed foreign investment into the region, but it is a factor that does not apply in the event of continuous currency depreciation. However, currency stability has now been achieved in Saudi Arabia — something which was not evident prior to setting the dollar-to-Saudi riyal rate at 3.75 in June, 1986.”
Sfakianakis said “At this point, at a time of high and near record oil revenues for Saudi Arabia it would not be prudent to adjust the currency upward. A revaluation would also make economic sense if inflationary pressures were predominantly external. At present, the inflation experienced in the Kingdom is mainly domestic. Also, the global economy is at a crossroads.” He added, “Advanced economies, like the US and the euro zone, are witnessing an ease in inflation. In contrast, emerging economies are seeing higher energy and food prices. Hence, US-made goods could offset the possible higher cost of goods from various emerging countries. However, a revaluation would reduce the state’s oil income at a time when the state accumulates much needed income from oil, so it can be deployed in the domestic economy and increase domestic investment.”
Sfakianakis said: “A slightly undervalued currency is better than a lower oil revenue scenario that would be experienced following a revaluation.”
The Saudi Arabian Monetary Agency (SAMA) earlier categorically dismissed speculation that it planned to revalue the riyal against the US dollar. The value of the riyal rose recently to a 21-year high at SR3.735 against the dollar, which produced rumors of ditching the dollar peg.
SAMA authorities said recently that the stability of the currency was vital for investors and the riyal would not be disturbed unless the dollar suffered a serious downfall.
The IMF report said Saudi Arabia’s macroeconomic performance remained very strong in 2006. Although real GDP growth decelerated to 4.3 percent as oil production contracted by 1.5 percent in line with OPEC’s decision to cut output, nonoil growth accelerated to 6.3 percent, supported by an expansionary fiscal policy and buoyant private sector activity.
The Saudi authorities continue to support oil market stability through the implementation of a $80 billion investment program to increase oil production capacity to 12.5 million barrels per day (mbd) by end-2009, expand gas processing facilities, and increase oil refining capacity at home and abroad by 43 percent to reach 5.9 mbd. They are also actively considering additional investments aimed at expanding oil production capacity to 13.1 mbd by 2013.
The IMF said Saudi Arabia’s monetary expansion accelerated again in 2006. The net foreign assets of the banking system rose sharply, reflecting higher government deposits, the shortage of riyal-denominated assets, and a narrower or negative differential between the riyal and dollar interbank deposit rates.
