Saudi Authorities Panic - Ban Speculation On Riyal Devaluation Amid Banking Crisis

Tyler Durden's picture

With Saudi Riyal forwards plunging back above 3.81, dramatically weaker than the current peg, Bloomberg reports that Saudi authorities are cracking down on currency traders as speculation mounts that the world’s biggest oil exporter won’t be able to maintain the riyal’s peg to the dollar as revenue plunges.

Saudi Arabia ordered banks in the kingdom to stop selling some products that allow speculators to bet against its currency peg just days after demanding information from lenders on the offerings, according to people with knowledge of the matter.


he Saudi Arabia Monetary Agency sent a circular to banks this week saying that dollar-riyal forward structured contracts are banned with immediate effect, said the people, asking not to be identified because they are not authorized to comment publicly. Forward foreign-currency transactions backed by actual goods and services will still be allowed, the people said.


The regulator, also known as SAMA, has asked lenders for details on derivative deals dating to January, saying they hadn’t informed the central bank about some products. An e-mailed request for comment to the agency outside of normal office hours on Friday wasn’t immediately returned.

"The directive shows the continuing disconnect between the Saudi foreign-exchange policy and market expectations," Raza Agha, VTB Capital’s chief economist for the Middle East and Africa, said by e-mail. "SAMA appears committed to the exchange-rate peg despite the cost to foreign-exchange reserves, large fiscal deficits and consensus forecasts that see only a very gradual rise in oil prices."

SAMA ordered banks to stop selling options contracts on riyal forwards at a meeting in Riyadh on Jan 18., people with knowledge of the matter said at the time, which explains the surge in the chart at that time, but it appears funds have found another vehicle to implement their bets.

It makes sense, since as's Eugen von Bohm-Bawerk explains, the Saudis have two tough choices:

1) maintain the peg, control price inflation through continued deflation of the money supply and get a full-blown banking crisis; or


2) alternatively, reflate the money supply, increase speculation in riyal forwards, devalue and get massive price inflation through the extremely important import channel.

During the reign of the mighty petro-dollar standard, it was necessary for major oil exporters to recycle their dollar holdings back into the dollar-based financial system to maintain their self-imposed exchange rate pegs. US government bonds are the very centrepiece of this elaborate system and it is thus no surprise to see the dollar price correlate well with overall OPEC TSY holdings. In other words, when oil prices were high, oil exporters amassed a capital surplus that were channelled into, among other things, US treasury bonds. When oil prices fell, oil exporters had to liquidate TSY holdings to cover capital shortfalls.

 Oil Price vs OPEC TSY Holdings

It is interesting to note that the more money and credit issued in the US the more foreign goods could be purchased by Americans and by extension the more foreign demand for US TSYs rose. The savings glut proposed by Bernanke was, and still is, nothing more than exported dollar inflation. There were no savings glut, but rather an indirect form of QE long before QE became an official policy. Home equity withdrawal lines through commercial banks, based on phony asset appreciation promoted by an accommodative Federal Reserve policy stance, increased Americans purchasing power, which inevitably leaked into global markets. Growing financial imbalances were exacerbated by the fact that there were no functioning pricing mechanisms to correct these flows.

With dollars flowing into oil exporting countries it would be natural for the recipient exchange rate to appreciate whilst the dollar depreciate. However, many oil exporters have pegged their exchange rate to the dollar so no such effect took place. Instead, local monetary authorities bought up dollars by inflating their own local currency to maintain the pre-set price. As the chart below shows, in a fixed exchange rate system pegged to a freely floating, and thus rapidly inflating and deflating, currency the LCU will have to inflate and deflate accordingly. With no price effect to soften the impact, any change in demand will be borne by supply. Compared to a flexible exchange rate regime, the inflation and deflation of the LCU will have to be larger with a fixed price of the LCU in relation to the dollar.

    Fixed and flexible FX regime

In the boom time it is easy to adjust as the monetary authorities can inflate the LCU to buy up dollars and create the consequent phony boom in the domestic economy. Local businesses thrive, credit is plentiful and asset prices rises. Very few complain.

However, as the dollar deflation takes hold the very opposite effect must by necessity occur. To maintain the exchange rate peg monetary authorities must buy up LCU through sales of previously accumulated dollars.

The key metric to watch for dollar dependent economies with exchange rate pegs is the value of domestic money supply (at the fixed dollar price) relative to FX reserves. If domestic claim to dollars, id est money supply, exceed FX reserves it is highly likely that the monetary authorities will be forced to devalue in order to realign the two metrics. If we look at an economy like Saudi Arabia, where there have been a lot of talk about devaluation, we find that there are more than enough FX reserves to cover the outstanding money supply. Since there will be no positive effect from a devaluation, there are no immediate devaluation threat.

SA FX vs M2

However, at current trends the FX reserves will drop below M2 by late 2017 or early 2018. Current trends does not lead to very pleasant outcomes for the Saudi economy because the domestic money supply is and will continue to deflate. This will expose internal malinvestements, which will show up as increasing NPLs in the banking sector, which in turn will lead to further deflation.

It is thus tempting for the Saudi government to reflate their economy by pushing more Riyals into the system; but this runs the risk of exacerbating the possibility of devaluation as the money supply will soon exceed falling FX reserves.

As most of the rest of the world, also the Saudis have become path dependent; 1) maintain the peg, control price inflation through continued deflation of the money supply and get a full-blown banking crisis; or 2) alternatively, reflate the money supply, increase speculation in riyal forwards, devalue and get massive price inflation through the extremely important import channel.

This obviously begs the question; at what oil price can the Saudi’s mange to muddle through without ending up in either 1 nor 2.  At today’s price of around USD50 / bbl Saudi Arabia will burn through USD90bn worth of reserves per year.Change in FX reserves vs oil price

This means under a mild deflationary scenario FX reserves will fall below M2 already by early 2018; even with a 10 per cent cost reduction. At 60 dollar and only 2 per cent reduction in cost Saudi Arabia will probably not have to worry about severing the peg. FX vs M2 under different scnearios

Unless prices continue upwards, it will be interesting see what route, and which risks, the Saudi government is willing to take on. For now it appear route 1 is the preferred one, but as the banking crisis escalates we expect a gradual movement toward route 2. Unless oil prices spikes back to USD60 /bbl plus, and save the day. We doubt it!

*  *  *

Finally, given the ban on FX products - and the seemingly inevitable de-pegging discussed above - one potential way to play the devaluation is via CDS...


In fact, as the FX ban comes into play, it's clear CDS is starting to become more active and more indicative of Saudi stress that forwards.

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Tinky's picture


Are things about to get Riyal?

Digbreamer's picture

Totally for riyal dude!

Doom Porn Star's picture

Totally surriyal.

Some will lose their heads.

johngaltfla's picture

No special nights for their camels any longer...

Never One Roach's picture

Since the Saudis launder their billions in the UK, I exp[ect London property prices to double again in the next 6 months a result of massive outflows of money from SA.

Free_Spirit's picture

Even that markets now turning, offplans are only being sold on the basis of full deposit refund.  investing in London property doesn't even guarantee the capital back let alone any growth. The release of hundreds of thousands of homes on fomer TFL land will also ensure the link stays broke. 

Wile-E-Coyote's picture

Top end house prices in London have been falling this year and the rich are renting

OldPhart's picture

I'm loving how we fuck our friends and enemies (usually simultaneously).

Do we get to inflate the dollaor vs the petrodollar?

Saudi Arabia, we know that our government loves you.

As an average American, I'm looking forward to your implosion.

It will kill neo-conservatives in both parties.

Arnold's picture



The chinks have not been metioned yet.

Their 1000 year plan to become the World Reserve Currency is all coming together now.

Thanks for the  lead in and reminder OP.

The central planners's picture

keep stacking Riyal gold and silver not paper promises.

Rattling Bones's picture

That's for 9/11, bitchez.

tarabel's picture



What worries me most about developments in Saudi Arabia is that there appear to be two completely opposite factions-- each of which is running half the government.

One faction is cutting back expenses and borrowing money on the bond market.

The other half just threw 3.5 billion dollars at Uber.

Those two things do not go together in any rational sense of the word.

Doom Porn Star's picture

Selling debt and buying assets makes perfect sense if you intend to default on the debt and abscond with the assets...

tarabel's picture



That's a very perspicacious observation.


But Uber?

COSMOS's picture

I am sure the lenders/bond holders will be very 'Perspiratious' very soon hahahha

FedFunnyMoney's picture

Break the peg and we break Riyadh. A "twofer".

Kagemusho's picture

Remember last year's massive gold heist in Abu Dhabi?

And more here:

Notice how that dropped off the radar screens? Probably for very good reasons, as several major players are now in very serious financial straights.

How much Saudi gold was pilfered? How much of that was needed to prop up the Riyal?

Ban KKiller's picture

Ok, so I go long sand. 

zipit's picture

Back to camel trading soon.

Kagemusho's picture

The smarter ones know what's up.

"My grandfather rode a camel, my father rode a camel, I drive a Mercedes, my son drives a Land Rover, his son will drive a Land Rover, but his son will ride a camel" -  Sheikh Rashid bin Saeed Al Maktoum

HenryHall's picture

They can go on forever if the royal family were to return personal wealth to the sovereign nation funds.

HRH of Aquitaine's picture
HRH of Aquitaine (not verified) Jun 4, 2016 11:00 PM

When you threaten the world reserve currency holder with flooding the world market with US treasuries, do not be surprised when there is retribution. Also known as payback, bitches. Go pound sand.

buttmint's picture

Midnight at the Oasis...or did you forget already?

Thalamus's picture

That's riyally messed up, kind of like there were 15 Saudi hijackers so let's bomb Iraq.

. . . _ _ _ . . .'s picture

"the Saudis have two tough choices:"

There is a third - Saudi Aramco IPO.

Gatto Carlo's picture

Haha, of course! Will be a big success.... Underwriting banks will put those shares into the portfolios of their ignorant muppet clients. People with knowledge would stay away from this. 

. . . _ _ _ . . .'s picture

All I stated was that the choice exists; I did not weigh in on its merits/faults.

Gatto Carlo's picture

Saudi Arabia will have much more challenges to manage internally. How to keep the 80 tribes under control (some of them with hundreds of thousands of members), who have been forced into "submission" by the al-Saud family by sword supported by the al-Sheikh clerical family (later "consolidated" with marriages with daughters of many tribes) and who have been bribed for loyalty since with money and privileges, when the money/bribes are not flowing anymore? Will they question and challenge the al-Saud leadership status and the al-Saud's immense slice in the oil revenue cake? How will the clerics (predominantly controlled by the al-Sheiks (descendants of Mohammed Abd al-Wahab, pact since 1744)) and the tribes react when the al-Sauds should decide to create a Saudi society based on more know-how/knowledge/skills rather than faith? (Remember the internal power-struggle in KSA when they tried to introduce TV or remember 1992 when the al-Sheiks forced the al-Sauds to have religious envoys in every embassy and to establish a ministry of religion…). Will the pact between the al-Sauds and the al-Sheiks fall apart? Even worse, what is going to happen when the Shia tribes (+/- 3 million) that have been living for centuries in the areas where most of Saudi's oil reserves are should no longer accept the al-Saud/al-Sheikh reign and for whom the self-proclaimed leadership status of the al-Saud King among Sunni Muslims as the "Custodian of the Holy Sites" (just a notch below the supreme title of "Calif" which is now claimed by the leader of ISIS who pretends to be a member of the Quraysh tribe of the prophet (which is one of the conditions for being the Calif)...) does not have any meaning at all? - Trouble is ahead and much more instability in the region! Interesting also: ISIS is in fact the direct challenger of the Saudi regime. Abu Bakr al-Baghdadi positions himself in the Sunni hierarchy as "The Calif" higher than the Saudi King (who is not a Quraysh and could only claim the title "Khadem al-Haramain" (Custodian of Holy Sites)),...and the way ISIS tries to build up its state reminds one strongly of the way the al-Sauds built their state together with the ultra-orthodox al-Sheiks/al-Wahabs... 

You Only Live Twice's picture

This basically means that the end of the petrodollar is closer at hand than we think, as the Saudis may have to ditch the petrodollar to save their currency if Oil stays low for the forseable future. 

Faeriedust's picture

Tyler, TYLER.  If you MUST hire Chinese writers, you must ALSO assign them English-native editors.  This article is barely comprehensible for all the grammatical errors by someone who clearly is unfamiliar with the proper use of the definite article and verb tenses.  And the spelling errors are appalling.

I am available for consultation weekends and evenings if necessary, with 40 years of professional proofreading and copyediting experience.  But PLEASE, don't print such incompetent copy.  It's disgraceful.  It also adds to the difficulty of abstruse economics, when a reader must constantly make guesses as to the writer's intent due to ambiguous or misleading grammar.

HillaryC's picture

...the Saudis are always invited to my Christmas Party.


Hillary Rodham Clinton

Hannibal's picture

I can't help to Not feel any pitty for these headchoppers...