'Saudi currency takes a tumble after ties cut with Iran’
Saudi Arabia’s national currency, the riyal, has fallen sharply in the wake of Riyadh’s move to sever ties with Tehran, according to Reuters.
The Saudi money dropped against the US dollar in the forward foreign exchange market early on Monday, raising concern in the Persian Gulf monarchy that dollar funding for the kingdom could become more expensive, the report said.
On Sunday, Saudi Foreign Minister Adel al-Jubeir announced the kingdom's severing of diplomatic relations with Iran following Tehran's strong condemnation of the Riyadh regime’s Saturday execution of prominent Shia cleric Sheikh Nimr al-Nimr.
On Monday, one-year dollar/Saudi riyal forwards jumped to 680 points, near a 16-year high, from a close of 425 points on Thursday.
The riyal has little scope to move in the spot foreign exchange market because of its peg of 3.75 to the dollar, so banks use the forwards market to hedge against risks, the report said.
In the last few months, the riyal dropped in the forwards market to its lowest level since 1999 because of fears that huge Saudi budget deficits due to low oil prices might eventually force Riyadh to abandon the currency peg.
An austerity budget for 2016, which Riyadh announced last week appeared to partly ease such fears, but geopolitical tensions may now increase them.
According to Reuters, the breaking of diplomatic ties will not necessarily have a direct impact on the economies of Iran and Saudi Arabia, which have ‘minimal’ trade and investment ties.
But geopolitics could make foreign banks and investors more wary of funding Saudi Arabia, at a time when Riyadh is considering borrowing abroad to ease the pressure of funding its fiscal deficit on the domestic banking system.
"One-year forwards will likely touch 800 points levels this week, depending on the level of escalation of the events between Saudi and Iran," Reuters quoted a senior bank trader from the region, who spoke on condition of anonymity.
A recent report said Saudi Arabia’s economic growth is expected to further slow down in 2016 after the country announced record budget deficits due to slumping oil prices.
Jadwa Investment’s forecast report, released last month, said the Saudi economy will grow by only 1.9 percent this year, down from 3.3 percent in 2015.
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