JEDDAH, 25 October 2006 -- The Saudi Arabian Monetary Agency (SAMA), the country's central bank, yesterday refuted as baseless reports that the Saudi riyal would be revalued against the US dollar after the Eid Al-Fitr holiday. The riyal is currently pegged at 3.75 to the dollar.

"There is no basis at all for these rumors. We don't have any plan to change the value of the riyal. The present value is fair and the Gulf Cooperation Council is committed to maintaining the present exchange value of its currencies," SAMA Gov. Hamad Al-Sayari told Al-Watan daily.

The SAMA chief emphasized the growing strength of the Saudi economy as a result of new projects drawing both domestic and foreign direct investments. He claimed that inflation rate in the Kingdom was at its lowest. "In the light of these sound economic indicators there is no justification to revalue the Saudi riyal," Al-Sayari said about strong rumors on possible change in riyal's exchange rate after Eid.

In Riyadh, Motasher Al-Morshed, financial analyst, said the speculation over readjustment of the riyal was set afloat in the context of the GCC move toward a unified currency.

The other factor was the strong performance of the Saudi economy fueled by high oil prices together with the continued pressure on the dollar.

Since some other Gulf currencies like the dirham and the Qatari riyal have different exchange rates vis-a-vis the dollar, speculation was rife that the Saudi riyal would have to be readjusted to bring it in line with other Gulf currencies. The SAMA governor's statement should reassure the public that the Saudi riyal remains a stable currency, he added.

"As a result of the linkage of GCC countries to a unified monetary system, a single GCC member cannot take a decision alone either to increase or decrease the value of its currency," said Raja Al-Baqami, a monetary expert.

Sayari's comments pushed the riyal down yesterday to trade near 3.75 against the dollar. It slipped to 3.7480 earlier in the session before reaching a bid/offer of 3.7421/3.7471.

The Saudi riyal surged to a five-and-a-half-month high against the US dollar on Monday amid revaluation rumors.

With the Saudi and Gulf markets closed for the Eid holiday for much of the week, all dealings in the currency were offshore and traders said thin liquidity was exaggerating moves.

According to Reuters, the riyal traded up to 3.7420 per dollar, its highest since early May when investors bet the Kingdom would revalue its currency in line with a Kuwaiti move. The gains follow an even bigger move on Friday, which saw the biggest one-day riyal rise in eight years. Banking sources said riyal purchases Friday reached $1 billion.

That move was just 0.16 percent but is significant for the riyal. Analysts said that if it firms beyond 3.74 without a response from SAMA, speculation about a revaluation might gather steam.

"The riyal moves are being caused by the rumors of revaluation. There was a liquidity squeeze in the market that made the riyal spot move well under 3.75," said Koceila Maames, Middle East and North Africa economist at Caylon in Paris. "From an economic point of view it doesn't really make sense but you can't rule it out as a political gesture -- as a gift to the population for Eid," Maames added.

Saudi economists said there was no justification to change the riyal value now.

Ehsan Bu-Hulaiga, a member of the Shoura Council, attributed the revaluation rumors to the increase in the Kingdom's foreign currency reserves and increasing demand for the Saudi riyal as a result of Umrah and Haj seasons. "This increase in demand will strengthen the Saudi riyal against other international currencies. But the increase is still low and does not justify taking exceptional steps by SAMA," he said.

"Saudi Arabia is committed to maintaining stability of the riyal's exchange value against the dollar," said Khaled Al-Muqrin, dean of the College of Economy at Imam Muhammad ibn Saud Islamic University in Riyadh.

Economists said the main hurdle for revaluation was that it would have to be closely coordinated with other members of the GCC, which plans a regional monetary union in 2010.

Currency analyst Al-Baqami pointed out that Saudi Arabia could increase the value of riyal for economic reasons as a result of growing demand for the currency in the market. He said an increase in Saudi exports as well as inflow of foreign funds could put pressure on the Saudi riyal. "All of the GCC states will keep their currency levels fixed until we have moved closer to the currency union in the Gulf, even though one clearly could argue for a tightening of monetary conditions in most Gulf states including Saudi Arabia," said Lars Christensen, senior analyst at Danske Bank in Copenhagen.

"One should however also note that the need for monetary tightening has eased with the drop in oil prices," he added.

A Riyadh-based analyst said Monday's speculation appeared to have been sparked by growing orders for the riyal ahead of the annual pilgrimage, due to start in late December.

"It's a seasonal thing. Whenever the Haj nears, demand on the riyal surges mainly from banks in the Muslim world," said the analyst, who asked not to be named.

"Some of these banks, for instance in Egypt, charge fat margins on the sale of the riyal to pilgrims, so they can afford to pay a relatively high price for its purchase," the analyst said.

There has been intense market speculation about a possible revaluation of the Saudi riyal ever since Kuwait allowed its dinar, a more flexible currency than the Saudi riyal, to appreciate against the dollar in May.

Soaring oil revenues have been putting pressure on fixed exchange rates in the Gulf. The Dubai Chamber of Commerce and Industry said this month the Saudi riyal was undervalued as much as 33 percent.

A weak dollar, the currency in which Gulf oil exports are priced, tends to fuel inflation in the Gulf as imports are usually denominated in other currencies. Around half Saudi imports are priced in euros and yen and a revaluation would boost the international purchasing power of the riyal.

The West has also been calling for greater exchange rate flexibility in order to help redress global imbalances. Richard Fox, credit analyst at Fitch Ratings in London said a revaluation may bring advantages on inflation but price growth is not as big an issue for Saudi Arabia. But he added: "Most Saudi assets are in dollars and if they revalue they will take a loss on that. It's not something they will do lightly."

By P.K. Abdul Ghafour

© Arab News 2006