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    A Saudi banker displays the new one hundred riyal banknote bearing the portrait of Saudi King Abdullah bin Abdul Aziz al-Saud at a bank in Riyadh, 05 June 2007

    Dollar Pegs in Saudi Arabia, Hong Kong Bleeding Due to Turmoil

    © AFP 2019 / Hassan Ammar
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    While certain nations are solving their fiscal insolvency issues via crash devaluations at the expense of domestic consumption, US dollar-pegged Saudi Arabia and Hong Kong can’t afford such an easy way out, yet; their time might slowly be running out.

    Kristian Rouz — Amidst the unfavorable investment and capital flow environment in emerging markets, the two most prominent US dollar-pegged currencies, the Saudi riyal and the Hong Kong dollar, are still bound to stay within their current trading gauge, as indicated by their respective monetary authorities. A devaluation would, however, be a better option for Saudi Arabia and Hong Kong alike in the short-term; however, the local regulators chose to commit to longer-term benefits to the US dollar peg rather than solve their fiscal issues at the expense of domestic consumers. 

    Saudi Arabian authorities decisively ended speculations regarding a possible riyal devaluation by directly prohibiting local banks from betting on currency sell positions on Wednesday. One of the world's largest oil exporters, Saudi Arabia is facing hard times, with petrodollar revenues shrinking; it must use its FX reserves to support domestic investment and the riyal's FX rate.

    There has been rife speculation recently that Saudi Arabia will de-peg the riyal from the dollar with a subsequent devaluation, which could help solve the FX rate stalemate and provide the domestic economy with abundant liquidity without burning the FX reserves. However, Riyadh opted not to devalue, and issued a new directive prohibiting betting against the riyal in order to "to kill this speculative activity over the sustainability of the riyal peg," the Saudi Arabian Monetary Agency stated.

    Saudi Arabia is heavily reliant on oil exports and imports everything else. In other words, a crash devaluation in a scenario similar to Brazil, South Africa or Russia would significantly undermine the quality of life in the kingdom and spur massive inflation. The total volume of Saudi FX reserves is roughly $628 bln, with about $100 bln spent throughout the past year in order to support the currency FX rate and investment level.

    However, the Saudi budget deficit is nearing its highest level since 1991, and the government is taking urgent measures to lower the nation's dependence on oil exports. Whilst Riyadh struggles for better fiscal performance, the nation's pace of growth in 2016 is expected to total just 1.2%, its slowest in 14 years.

    Meanwhile, Hong Kong during the past two weeks has also experienced a rise in speculative activity against its greenback-pegged HK dollar, with forward contracts dropping to their 16-year lows, suggesting the market expects a devaluation. The HK dollar has been pegged to the US dollar since 1983, and the recent financial turbulence in mainland China and the Hang Seng Index alike have stirred concerns of Hong Kong's possible fiscal trouble should the peg persist.

    "It's like an attack on all fronts in Hong Kong," Nordine Naam of the Paris-based Natixis said. "Investors are getting more and more risk adverse, especially with regards to China and so they're getting out of the region. For the time being, Hong Kong has lost its safe haven status."

    The HK dollar is pegged within the gauge of HK$7.75-HK$7.85 per 1 USD. Most recently, the FX rate dropped to HK$7.8243, inching towards the lower end of the range.

    Similar to Saudi Arabia, Hong Kong is heavily reliant on imports of all kinds of goods, meaning a devaluation would hit the domestic consumers. That said, the local monetary authorities can't afford to solve their looming fiscal issues at the expense of consumers.

    The nature of Hong Kong's possible fiscal turmoil stems from the city's reliance on financial market operations. The recent global stock meltdown and rife volatility in mainland China have all effectively brought down the commercial revenues of the Hong Kong-based traders and investors, stirring concerns regarding the city's budget performance. A devaluation would be an easy solution for the local authorities, however, they can't seem to be able to afford it. 

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    Tags:
    Oil, economy, market review, Saudi riyal, US dollar, United States, Hong Kong, Saudi Arabia
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