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Saudi Arabias pains are visibly on the rise as the economy facing threats of downgrades, if it fails to check on its ballooning fiscal deficit, which is projected to be 15-16% of GDP this year. In a separate article, we noted banks remain very vulnerable, facing threats of not only no deposit growth but net deposit withdrawal, due to its strong linkages to oil.
Saudi Arabia in the midst of economic turmoil has pledged to maintain its peg with United States Dollar at Real 3.75 per Dollar. But FX reserve is bleeding badly to protect the peg and to alleviate pressure from domestic economy from lower oil price, operating under fixed exchange rate regime.
Since, 2014 after reaching its peak in August, Saudi Arabias FX reserve declined by 20.5% according to latest data from February, 2016. It is now hovering at levels seen in 2012, around $592.7 billions. In January alone it lost close to $94 billion worth of reserves.
Expect Saudi Arabias reserve to decline further not only just due to larger deficit and lower oil price but also due to the fact increase in Reserve showing strong correlation with increase in U.S. Federal Reserve balance sheet.
The pain is likely to rise, when FED balance sheet actually starts to shrink.
However, shifting the fixed rate range weaker may not solve purpose. Speculative forces could ramp up pressure for further weakness. All in all SAMA (Saudi Arabias Monetary Authority) is in a tough spot.
Chart courtesy tradingeconomics.com
