Their remarks came as Western economists speculated over whether the euro has a future 10 years after its birth, as fears grew over contagion from the euro zone sovereign debt crisis.
As fears grew over a possible currency war in some key markets, the Indian rupee fell to an all-time low Tuesday as oil refiners and other companies scrambled to buy dollars.
Jarmo T. Kotilaine, chief economist at the National Commercial Bank, said the main risk for Saudi Arabia about the currency volatility comes from a number of key oil export markets taking a hit because of the eroding purchasing power of their currencies.
This would weaken global oil demand in relative terms, although it should be remembered that the market still looks quite tight, he said.
Financial analyst Salahuldean Khashoggi stressed that he did not believe Saudi trade would be impacted by any turbulence of euro as more than 80 percent of the global trade is using US dollar.
But he said a US debt crisis will flip the world upside down. It will definitely take the global economy into a double dip recession, maybe worse than the one in the 1930s.
The Saudi banking system has a very limited exposure to European debt, he pointed out.
Spanish and Italian bond yields shot higher again on Tuesday, underlying the deep strains on euro zone economies, as stock markets inched up following a pounding the previous day.
Commenting on the latest market developments, Khan H. Zahid, vice president and chief economist at Riyad Capital, said the euro has been volatile in recent months, strengthening against the dollar and weakening at various times.
“Such volatility increases the cost of doing business and investments (e.g., hedging against currency fluctuations) and thus act as a damper,” he added.
“In addition, when the euro falls against the dollar, as in recent weeks, it increases Saudi imports from euro zone and reduces exports because euro zone goods become cheaper,” he said.
Commenting further on the debt crisis fallout, Kotilaine said: “In any market, uncertainty is a negative influence. It tends to cause people to delay consumption and investment decisions or to manage their risks through hedging which is costly and reduces the level of activity by increasing its price. The great risk linked to the situation in Europe is a sharp and sustained drop in the value of the euro below the current levels. This would obviously increase the euro price of dollar-denominated products such as oil and would begin to erode demand.”
On a worst case shock, he said a bout of euro weakness could produce a significant supply shock to the fragile European economy. These effects tend to be only very partially mitigated by long-term contracts.
Economic policy in Saudi Arabia is anchored in clear principles, guidelines, and institutions that should ensure a high degree of resilience, Kotilaine said.
“The dollar peg, while a potential source of vulnerability in the event of dollar weakness, is a simple, transparent system that enjoys a high degree of credibility. In a time of uncertainty, it serves as an important source of continuity and predictability,” he added.
He said the government has for years pursued highly successful counter-cyclical fiscal policy where windfalls during periods of high oil prices are saved and resources mobilized in the face of economic uncertainty and weaker aggregate demand.
“The longer-term strategic goals of economic policy - diversification, infrastructure build-up, etc. - have remained largely unchanged, if necessary with added government support to ensure their timely implementation. This consistency and clarity of the main principles of policy should serve Saudi Arabia well even in the face of a severe economic storm,” Kotilaine said.
Also Tuesday, German Chancellor Angela Merkel called for much tougher rules to override national budget sovereignty if euro zone states failed to follow agreed EU rules.
Paul Gamble, head of research at Jadwa Investment, said: “A slowdown in the global economy will hit demand for oil and therefore prices. The same is true for other exports. However, the Kingdom should benefit from lower prices for other commodities.”
He added: “There shouldn’t be too much impact on remittances from the Kingdom, but the fall in the value of some South Asian currencies means the money remitted will have greater purchasing power in the home countries.
Reuters reported Tuesday Indian rupee has skidded nearly 17 percent from a 2011 high reached in late July as risk-averse investors flee emerging markets. At 12:40 p.m., the rupee was at 52.56/57 per dollar, after touching an all-time low of 52.73, and 0.8 percent weaker than its previous close of 52.1550/1650.
Sri Lanka has also devalued the rupee currency by 3 percent in a shock monetary policy change.
Optimists note that a weaker rupee is good for exports and say the need for foreign currency may encourage the government to act on long-standing promises to loosen foreign investment controls.
Commenting on the rupee’s fall, Khashoggi said these developing countries will suffer in marketing their products with their currencies appreciating as a result of deteriorating value of US dollar. They may lose there competitive edge, but at the same time if they can survive this trend and keep selling more goods, their trade balances will increase, and the higher value of their currencies will work as a shield against imported inflation.
“If this works, Saudi Arabia will benefit in an increased demand on oil, but at the same time, it will increase inflationary pressures within the Saudi economy,” Khashoggi said.
