US dollar knocks other currencies down a peg or two

It is a bad time to be a commodity currency. On August 20, Kazakhstan abandoned its peg to the US dollar, and the tenge promptly fell by 23 per cent. The oil price shock is rippling through commodity exporters, spurring some speculation that the Arabian Gulf currencies might be next.

From parity to the US dollar at the start of 2013, the Canadian dollar is now 25 per cent lower, while the Australian dollar has lost 30 per cent of its value over the same period. Nigeria’s naira is under pressure and Venezuela’s ironically titled “strong bolívar” black market rate is a hundredth of the official level.

Russia’s rouble has been on a roller coaster – it stood at 34 to the dollar in the middle of last year, then crashed to 67 by February this year under the combined strain of falling oil prices and sanctions imposed over the invasion of Ukraine. The rouble was back at 50 by May, but since then the renewed oil slump has pushed it down to about 66 to the dollar.

Kazakhstan had little choice but to devalue, as Russia is a major trading partner, and its other big neighbour, China, decided on August 11 to devalue the yuan by almost 2 per cent.

For Kazakhstan, a weaker currency helps the competitiveness of manufactured exports such as chemicals and steel.

The same is true of countries such as Russia, Canada and Australia. They have sizeable industrial sectors that can increase exports, and their high-cost oil and gas production becomes much more feasible when local costs are reduced. Russia’s oil sector rebounded dramatically following its 1998 economic crisis.

After Kazakhstan’s move, attention turned to other currencies that might be under pressure. Forward currency markets suggest a devaluation of the Saudi riyal by 1 per cent within a year – or, equivalently, say, a one-in-five chance of a 5 per cent devaluation.

Net foreign assets held by the Saudi Arabian Monetary Authority (Sama) did fall sharply from US$737 billion in August 2014 to $664bn in June this year. Since then, the kingdom has been financing spending by issuing bonds.

Both the Omani central bank governor Hamood Zadjali and the Saudi deputy central bank governor Ahmed Abdulkarim Al Kholifey denied that devaluation was on the cards but left themselves get-out clauses. As Mr Al Kholifey said: “Sama is committed to the policy of pegging the Saudi riyal with the American dollar.” However, that is not an unequivocal commitment to maintaining the peg at its current level.

It would not be the first time that Gulf oil producers had devalued, but it would take a veteran central banker to recall the last occasion. Saudi Arabia devalued by 2.75 per cent in June 1986, following one of history's most dramatic oil price slumps, to reach the rate of 3.75 riyals per dollar that has held ever since – through the First Gulf War, the late 1990s Asian Crisis and $10 per barrel oil, the 2000s oil boom and the 2008 financial crisis. Oman also last devalued in 1986.

Weaker GCC currencies would be problematic, raising the price of imported food and other goods, so stoking inflation. With petrol making up about 95 per cent of exports in Kuwait, 90 per cent in Saudi Arabia and 75 per cent in Oman, the gain to the competitiveness of other industries would not help much.

Devaluation would increase the dollar cost of energy subsidies, unless fuel prices were raised. Although it would reduce the government’s wage bill in dollar terms, this would only be temporary, as citizens would demand cost-of-living rises while highly mobile expatriate labour would move on unless salaries were restored to internationally competitive levels.

And devaluation would also shake investor confidence and dent the reputations of Gulf countries for prudent financial management. For these reasons, speculators against riyals, dinars and dirhams are probably looking in the wrong place.

Robin M Mills is the Head of Consulting at Manaar Energy and the author of The Myth of the Oil Crisis.

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