Saudi Arabia: black swan of 2016

The Angolan kwanza collapsed by 15% in a few hours as soon as the country’s authorities effected its devaluation a few days ago. Last month it was Azerbaijan’s currency, the manat, which lost a third of its value in a few hours when its national central bank decided to abandon its indexation to the American dollar. In total, the manat will have lost 55% in 2015 in relation to the Greenback, even worse than Kazakhstan’s tenge which conceded 47% against the dollar, the Russian rouble 24%, the Turkmen manat 19%, Georgia’s lari a quarter, and the list goes on. The collapse of all of these currencies – which all have the obvious common denominator of petro-dependency – is now giving rise to the craziest of rumours about a phenomenon that is to send shockwaves throughout the global financial system: Saudi Arabia, the world’s top oil exporter, might abandon the indexation of its riyal to the American dollar.

Since petrol is negotiated in dollars, the correlation of the riyal to it – established in 1986 – has been a source of prosperity for Saudi Arabia. The country was able to calmly align its revenues with its expenses, both denominated in dollars, since this famous peg was incontestably a measure of its economic stability. While a country’s withdrawal of such an indexation – and therefore the substantial, inevitable decline of the its national currency that ensues – has the logical consequence of its exports being favoured, such an extremity is always very poorly received by the markets that rightly interpret it as a sign of failure of the country’s economic policy, and who lose their trust in the country. As a result, the positive effects of the national currency’s massive devaluation are largely negated – indeed flipped back on the country in question – which then also finds itself punished with more onerous imports.

However, the Saudi decision to leave the peg – the defense of which has cost them 100 billion dollars these last few months due to speculative attacks on the riyal – would be a priori to greatly stimulate its oil exportations which would become much cheaper overnight. Such a dumping would of course harm its competition and would have catastrophic effects on US shale oil production which the Saudis have been trying in vain to sabotage for more than a year, and which was the main reason for their orchestrated price slump that began in November 2014. However, having failed miserably to eradicate the American producers who have adapted sharpish to the price drop that has been ongoing since the end of 2014, Saudi Arabia would be risking big by persisting in this poker game. The country has now become so vulnerable as to be in desperate need for barrels to be at $90 in order to be in a position to support its running costs. What’s more, the favourable upshots of the riyal’s dollar peg withdrawal will from next year onwards be nullified by the arrival of hundreds of thousands of barrels of Iranian oil on the market!

Well aware of these issues, and especially as it is no longer the go-to global producer, nor is it any longer in a position to impose its will on markets that are escaping its clutches, Saudi Arabia has therefore resigned itself to adopting measures of budgetary austerity. With a 2.5% tax on the value of unbuilt land around its cities and a widespread increase of electricity and water prices, this kingdom, having formerly purchased its social peace, today finds itself in a mad dash to escape potentially disastrous consequences. How does one sell off a black goldmine that has run dry? In such a situation where something has to give, the Saudi authorities are trying to turn attention towards the age-old Shiite enemy, even if it means dragging the whole Middle East into a financial and geopolitical abyss.