Give it up once again for Chairman Bernanke, ladies and gentlemen.
Saudis urged to revalue riyal
By Andrew England in Cairo and Roula Khalaf in London
Published: January 13 2008 22:03 | Last updated: January 13 2008 22:03
Saudi Arabia’s largest state bank has urged the government to consider altering the riyal’s peg to the US dollar and to diversify its assets by setting up a sovereign fund to boost returns and reduce exposure to the US currency.
The statement by National Commercial Bank’s chief economist comes amid intense pressure on the government to tackle rising inflation and consider the first riyal revaluation in 21 years.
The central bank has previously ruled out changing the peg, saying the effect of dollar weakness on inflation was relatively small.
However, Said Alshaikh, the NCB’s chief economist, said it was time to reconsider “provided that it is done gradually”, arguing that the effect of
inflation had extended to the middle class and was no longer confined to the lower-income population.
There has also been speculation about how best to manage its oil wealth as the kingdom enjoys large budget surpluses following the deficits of the 1990s.
The central bank has acted as the sovereign wealth fund but has invested conservatively. It is estimated that 85 per cent of foreign reserves –
currently at a record $285bn – are invested in dollar-dominated fixed-income securities. Mr Alshaikh said: “It would probably make more sense to use these resources in other types of assets across regions and in different currencies in order to maximise returns.”
Given the reserves, Mr Alshaikh estimated that any fund should be able to start with between $100bn and $150bn.
The government owns about 80 per cent of NCB but Mr Alshaikh’s comments do not represent official policy. However, he is thought to be the first prominent Saudi banker to urge the authorities publicly to create a sovereign fund.
The authorities have been considering various options for outside investments as they look at avenues to diversify holdings.
Both the central bank and finance ministry deny they are about to set up a separate sovereign wealth fund.
The central bank has said that enabling the Public Investment Fund, which has massive domestic holdings, to invest more aggressively overseas is under consideration.
People familiar with Saudi plans, however, caution that the debate within the highest echelons of power is continuing.
Mr Alshaikh said the timing for a fund was opportune because some foreign entities, particularly financial institutions, had become attractive with the subprime crisis and a slowdown in the US and parts of Europe.
Saudi Arabia has enough geopolitical and economic security to face its inflation crisis head-on. Unlike China, they have built up enough internal cohesion to be honest about the degree to which inflation has infected their economy. And also unlike China, they have not leveraged their entire economy on a historically cheap dollar, so they can solve their currency problem the right way — by a large currency revaluation.