Saudi economists call Fed move ‘golden opportunity’ to de-peg
By SARAH ABDULLAH | ARAB NEWSPublished: Nov 12, 2010 23:51 Updated: Nov 12, 2010 23:51
JEDDAH: With the US Federal Reserve’s recent decision to pump $600 billion into its economy as a stimulus to ward off increasing recessionary pressures, the question of whether Saudi Arabia and other Gulf states should keep their pegs to the US dollar has again taken center stage.
Voicing their opinions on the issue, several economists have come forward, calling the current turn of events, “a golden opportunity” to de-peg. They state that the US economy is experiencing an economic crisis and progressive weakening with economists fearing that future repercussions will include higher inflation rates in the Kingdom matching those of 2008.
“The time has come to lift the peg,” said Abdulrahman Al Saneh, professor of economics at the CBA in Jeddah, in an interview with Al-Eqtisadiah newspaper, a sister publication of Arab News. “This is a golden opportunity to de-peg before the dollar’s expected decline forecast over the next six months.”
He maintained that the recent move by the US Federal Reserve is a temporary fix that will not resolve the crisis. Nonetheless he did add that the present stimulus will have a temporary positive effect on the Saudi riyal and other currencies pegged to it by increasing the purchasing power of the dollar and give a slight boost to the currencies linked to it.
“The recent stimulus will also have a temporary effect in helping to stabilize inflation in the Kingdom currently at 6 percent, but does not mean that the opportunity to de-peg should be ignored.” Al-Saneh said.
On the other hand, Turki Fadak, a member of the Securities and Exchange Commission at the Jeddah Chamber of Commerce and Industry (JCCI), stressed appropriate action needs to be carried out in light of the Fed’s stimulus plan.
“Steps need to be taken to reduce any negative effects of the recent actions of the US Federal Reserve. This can be done by purchasing bonds and increasing the level of exports following a revaluation of the Saudi riyal from 3.75 to 3.00 against the US dollar,” Fadak said, adding that beyond these measures de-pegging needs to be considered to curb rising inflation.
He further stated that the Fed’s actions will have not only a domestic impact within the US but also global implications that can lead to dollar depreciation in the short to medium term. This will cause other currencies to have to work harder to raise the price of their currencies against the dollar followed by a rise in the prices of dollar-denominated commodities such as oil and minerals on the global market, in addition to raising prices of imports from Europe and Asia.
“Unfortunately, Saudi Arabia’s non-oil exports are not large compared to other countries. Because our exports are small and we have few things to ship outside and with all of our products pegged to the US dollar, this helps the US market but has a negative effect on Saudi markets as competition increases in response to a weak dollar,” he said, adding that he expects gold prices to reach $1,500 before year’s end.
Agreeing Salem Bajaja, professor of accounting at the University of Taif, has said that he expects the recession to continue globally and locally effecting emerging currencies and causing them to raise and lower exports due to eroding purchasing power.
Bajaja advised de-pegging the riyal from the US dollar, tying it to a basket of currencies as an indication that the US is skeptical in restoring economic strength while speeding up the process of ratifying the GCC unified currency.
John Sfakianakis, chief economist of Banque Saudi Al Fransi, said the likelihood of the Kingdom de-peging its currency to the dollar is simply not in the forecast.
“In my opinion, I don’t believe Saudi Arabia or any of the Gulf States will choose to revalue or de-peg from the dollar as brought to light in 2007-2008,” Sfakianakis told Arab News.
He stated that the forces currently in play are not the same as those experienced in 2008 with Gulf States preoccupied with credit recovery and growth of the non-oil private sector.
“The inflation forecasts are not expected to reach double-digits through 2011, so there is no reason to de-peg. Gulf state economies are now more in sync with the US than in 2008 with today’s loose monetary policy serving both interests and upholding the viability of the Gulf dollar peg,” he said.
© 2010 Arab News
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