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S&P sees no change in riyal peg for years

/By Arabian Post Staff/ Standard & Poor’s has re-affirmed its view that Saudi riyal peg to the dollar, a subject currently topping market debate, is unlikely to be changed over the next few years.

The rating agency’s rationale is that at a time of already significant change and regional geopolitical instability, politically conservative regimes such as those in the GCC are unlikely to increase uncertainty about their economic stability by amending this fundamental macroeconomic policy.

The long-standing currency peg helps to anchor the population’s inflation expectations, but binds Saudi Arabia’s monetary policy to that of the U.S. Federal Reserve.

Consequently, the riyal’s real effective exchange rate has appreciated by 16% since early 2014 and stands approximately 40% over the December 2007 level, according to Bruegel data. The riyal’s long-term real effective appreciation since 2007 has been the most pronounced among all GCC sovereigns.

S&P also does not expect the agreement on Feb. 16, 2016, between oil ministers from Qatar, Russia, Saudi Arabia, and Venezuela to freeze oil output at the levels reported in January to have a material impact on our oil price assumptions.

The first market reaction to this news was a further decline in oil prices. On the supply side, the rating agency notes that the freeze would take place at already record high levels of output for Russia and Saudi Arabia. In addition, we understand the agreement is conditional on other producers also freezing production.

It feels that such a change in policy direction is unlikely in Iran and Iraq. On the demand side, it sees China’s economic slowdown and debt load as a continuing top global risk.