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Saudi Arabia – Devaluation of the Riyal

Luis Durani

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The Saudi Riyal has been pegged to the US Dollar for the past 30 years but this may all soon change as the volatile oil markets will force them to abandon the fixed currency and devalue.

These types of mumblings have arisen before especially after the 2007/2008 subprime mortgage collapse. But this time the political and economic dynamics of the region have shifted and the Saudis will most likely uncouple their currency with the dollar. This devaluation is yet another battle in the long currency war that countries have been waging with each other since 2008.

What Has Happened So Far

Since 2014, the price of oil has dropped more than 60%, deemed to be one of the worst downturns in decades. When oil was at its peaks, new methods were being researched to help with its extraction. One of the most successful approaches was fracking. This method helped usher a new era for oil production. One of the consequences was that the US became an oil producer but the impact on global oil market would be devastating. Basic economic laws took hold, with an oversupply and weakening demand due to the languishing global economy, prices began to plummet.

Many initially thought the downturn was momentary and would be easily rectified by the Saudis, the largest holder of oil reserves. The Saudis could reduce production and prices would rise back up but instead they continued with full production. The Saudi intent was two-fold; regain market share rather than profits by making all other producers (mainly shale producers) go bankrupt and second coerce the Russians, whose national oil revenues comprise a large part of the state’s income, into some kind of bargain on Syria .

This policy backfired. The price of oil has dropped to levels that were not even contemplated by the Saudis and it is rattling their economy. They are beginning to experience large deficits. The Saudis have been forced to reel back their economic subsidies as well as implementing new taxes to close their budget deficits . The large foreign reserves that the Saudis have accumulated in the last several decades are being burned through in order to maintain the pegged Riyal’s value . Despite their large foreign reserves, the Saudis can sustain only a few years before a major currency crisis if it continues with the current fixed rate.

Currency Devaluation – Its Coming

At the moment, the Riyal is pegged at 3.75 to the Dollar. Ever since its introduction about 30 years ago, the fixed currency has been pivotal in safeguarding the Saudi economy from the fickleness of oil prices, which constitutes the overwhelming preponderance of the state’s income . Inflation is tightly controlled by tying the currency to US monetary policy. In addition, the pegged currency provides protection from the turbulent oil market by allowing the Saudi government to acquire copious amounts of foreign reserves when oil prices are high and protect it when oil prices drop.

But with the US Dollar growing stronger and the price of oil nose-diving, pressure is building on the Saudis to do something with the Riyal. Even though the Saudis have fared through similar currency issues before, tough times call for tough measures. A country usually devalues their currency for the following reasons:

  • To Boost Exports – local products are made cheaper as the currency depreciates against other currencies
  • Close the Trade Deficit – With a devalued currency, exports increase and imports will decrease resulting in a favor balance of payments
  • Payoff Sovereign Debt – If a country issues lots of debt, a devalued currency allows the country to pay off the debt quicker over time

What Does it Mean

If the Saudis go forward with the devaluation, it will lead to further financial and political instabilities. But one major rationale for devaluation is the potential additional revenues the Saudis can achieve even in the current dismal oil market. Based on financial analysis, the Saudis require the minimum price of oil to be approximately $50-60 Dollars per barrel to ensure the nation’s budget remains balanced. But with oil prices dipping below $30 Dollars per barrel, the Saudis will be forced to take some sort of fiscal action soon. The oil revenues are denoted in US dollars but the nation’s internal monetary matters are handled in Riyals. Devaluating the Riyal would mean “more” national revenue, which would help remove the financial strain in the short-term.

For a country like Saudi Arabia to engage in a currency devaluation can be interpreted as an economic attack, which would result in other nations partaking in such tit for tat devaluations . Such an action will further slowdown the global economy. But the Saudis might not be worried about such retaliations, since the beginning of 2016; the Chinese economy has been off to an abysmal start. Many speculate that the Chinese will soon cease supporting its currency, the Yuan, and will engineer a currency devaluation itself . If that measure is taken, the Saudis will find themselves justified to remove the fixed rate and devalue the Riyal.

As oil prices continue to tumble, the Saudis find themselves cornered to make a pivotal choice, which will affect the trajectory of the region and potentially the world forever. The Saudis can either reduce oil supplies or devalue its currency. While the former option appears to be the simpler path, the Saudis appear to be reticent and gambling that the longer they hold out, the more market share they would receive. With a burgeoning deficit and rapidly decreasing foreign reserves, the only other option is to devalue the Riyal, which will set off an economic chain reaction. The currency war that started in 2008 appears to be entering a new phase as oil prices continue to tumble.

Luis Durani is currently employed in the oil and gas industry. He previously worked in the nuclear energy industry. He has a M.A. in international affairs with a focus on Chinese foreign policy and the South China Sea, MBA, M.S. in nuclear engineering, B.S. in mechanical engineering and B.A. in political science. He is also author of "Afghanistan: It’s No Nebraska – How to do Deal with a Tribal State" and "China and the South China Sea: The Emergence of the Huaqing Doctrine." Follow him for other articles on Instagram: @Luis_Durani

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Economy

Russians Need to Strategise Trade with Africa

Kester Kenn Klomegah

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Russian business lobbying groups, together with about 40 business and industry heads, have shown interest in exporting their products to markets in Africa but found it difficult to access facilitation procedures in some of the countries.

To understand some of the processes and procedures, Nonna Kagramanya, the Vice President of Delovaya Rossia (Business Russia), moderated a special seminar to constructively discuss emerging issues and possible solutions on various foreign economic tracks. Representatives of governments, development institutions, private businesses as well as Southern and Eastern African diplomats attended the event.

She said despite the relatively small trade turnover with African countries, Russian companies were very interested in establishing stable long-term contacts with African partners.

As a first step, Ms. Kagramanya proposed the creation of a permanent discussion-line for all interested participants of the seminar to discuss a set of priority problems and barriers when working with Africa.

Polina Slyusarchuk, Head of Intexpertise (St. Petersburg-based African focused Consultancy Group), questioned whether Russia has a broader Africa policy or long-term strategy in there.

“Today, Russia wants to deepen its understanding of the business climate and explore trade and partnership opportunities in Africa,” she underscored.

While meetings organised between Russia and Africa have to be used to discuss thoroughly how to trade, efforts should be made to remove or lessen some of the barriers for mutual benefits. Now Russia’s main goal is to decide what it can offer that foreign players haven’t yet been made available in the African market.

Contributing to the discussion, the General Director of Intelnexus, Anatoly Yakimenko, introduced the participants to the opportunities for the development of Russian-African business cooperation, noting the favourable and hindering factors in the African market.

He stressed the need for potential exporters of Russia to adopt high-tech production and solutions to expand initiatives for more effective positioning of high-tech companies in Africa.

The Deputy Director of the Department of Asia, Africa and Latin America of the Ministry of Economic Development of the Russian Federation, Alexander Dianov, spoke about the non-financial support measures for Russian companies operating within the department.

“Currently, there are 10 intergovernmental commissions between the Russian Federation and African countries,” he said.

At the same time, he said: “There are trade missions only in four African countries, and if you take sub-Saharan African countries, the trade mission operates effectively only in South Africa. It is obvious that there is something to work on in terms of developing the infrastructure to support Russian businesses. If there is a serious request from the business community, we are ready to expand the geography of our presence.”

A representative of the Russian Export Centre (REC) in Africa, Dmitry Suchkov, drew the attention of companies to the need for in-depth analysis of national programmes of economic and investment development of African countries.

He spoke about the initiatives of the Coordinating Committee for Economic Cooperation with Sub-Saharan Africa.

Natalia Zaiser, the Chairperson of the Board of the African Business Initiative, pointed to the problems of ensuring security and stable “rules of the game,” as well as the need to identify five priority areas of business cooperation on the medium and long term perspectives for individual countries.

Representatives of the embassies of Rwanda, Tanzania and South Africa spoke about the integration processes on the African Continent, the potential of regional markets and national development initiatives.

Members of diplomatic missions also noted the greatly unrealised potential of cooperation between Russia and African countries, and interest in attracting investments in infrastructure, education and many other sectors.

They called for a wider interaction between African business circles and Russian businesses.

During the discussion, the participants mentioned high import duties, complicated certification procedure, high cost of products, expensive logistics, security and guarantee issues, and information vacuum as some of the barriers to Russian-African trade and economic cooperation. However, the participants agreed on the need to develop a comprehensive strategy for Russia to work with Africa.

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Economy

Curating a Vision with Young African Entrepreneurs

Jenni Jostock

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How can young people be involved in creating a future of work that is decent, equitable and bright? This November I was fortunate enough to take part in an event with this mandate at its heart.

The Youth Entrepreneurship and Self-Employment Forum (YES Forum) in Dakar, Senegal was co-organised by the ILO and our partners in the Global Initiative on Decent Jobs for Youth. It was a collaborative effort supporting young entrepreneurs in the region, and it was a joy to see this vision becoming real during the two-day event – with young entrepreneurs shining at different stages of the YES Forum.

More than 30 young entrepreneurs took on active speaking roles across the discussion sessions, a “Dragon’s Den” style pitching competition, and the Marketplace. This Marketplace offered participants the opportunity to float in between booths and to have one-on-one interactions with the presenting entrepreneurs and organisations.

The vibrant tone was set at the very start, with all participants given hand-made, customised notebooks, the product of an all-female team led by entrepreneur Ndey Fatou Njie for her business TIGA Gambia. TIGA Gambia is now an all-around fashion and accessories retailer, but originally zoomed in on providing locally-inspired swimwear – a large market gap that Ndey spotted and filled!

Not only were the TIGA Gambia notebooks a showstopper, they were also a colourful and popular extension of the empowering message of the YES Forum.

The innovative and vibrant spirit of entrepreneurs in their element was palpable all through the Forum, but shone particularly during the networking lunch and the Marketplace. It was difficult to lure the participants back into the plenary after these events, because they were so busy talking, forging synergies and building contacts.

While the young entrepreneurs embraced their speaking opportunities to the fullest, they also created a wonderfully inclusive setting that allowed everyone’s successes to be seen and recognised. I was particularly touched when the pitching competition winner, Malick Diouf, CEO of LAfricaMobile, immediately called his three competitors onto the stage to congratulate them on their incredible work.

Malick was humble about his win but his company deserves a special shout-out. LAfricaMobile serves as a digital bridge between African media publishers and organizations wanting to disseminate their content to the African diaspora. As a comms aficionado I was particularly impressed by how effortless their SMS service is in helping the African diaspora connect to what is going on in their home countries.

All in all, the YES Forum left a lasting impression on me for two reasons: Firstly because of the level of mutual support and cooperation that the young entrepreneurs showed, and secondly because the Forum truly catered for these young entrepreneurs and allowed them to share their stories and to explore collaboration. I believe it will leave a lasting result – of stronger alliances and greater empowerment.

Mariama Johm, founder of Afri Taste, a Banjul health joint that combats fruit and vegetable waste, summed up the atmosphere in her remarks during the Young Global Entrepreneurs panel: “I am glad we have the youth actually speaking here. We, young entrepreneurs, want to speak and let policymakers hear from us – not only here, but we want to make governments take into consideration what we are saying and that they should not make decisions on our behalf.”

ILO

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Easing US-China trade tensions could save millions of jobs

MD Staff

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Millions of jobs in the Asia and Pacific region have been put at risk by conflicts over trade, despite a recent agreement not to escalate tit-for-tat tariffs by the United States and China, according to a new regional UN report.

The 2018 Asia-Pacific Trade and Investment Report, issued by the UN’s development arm in the region, ESCAP, suggests that an escalating “tariff war” and resulting drop in confidence next year, could cut nearly $400 billion from the global gross domestic product, drive regional GDP down by $117 billion.

“As production shifts take place and resources are reallocated across sectors and borders due to the trade conflicts, tens of millions of workers may see their jobs displaced and be forced to seek new employment,” said Mia Mikic, the head of Trade, Investment and Innovation Division at ESCAP.

That said, the report also noted trade tensions have already had had a major impact, resulting in disruptions to existing supply chains and dampening investment. Trade growth slowed after the first half of 2018, and foreign direct investment (FDI) flows to the region are also expected to continue on a downward trend next year, following a 4 per cent drop overall this year.

In such a scenario, regional investment will be key to creating new economic opportunities, says Ms. Mikic, adding that “complementary policies” such as labour, education and retraining, and social protection measures must be placed high on the policymaking agenda.

This is also critical for ensuring progress on implementing the Sustainable Development Goals (SDGs), she said.

ESCAP has also called on countries to take full advantage of all existing initiatives to strengthen regional cooperation, including a new UN treaty on digitalizing trade procedures and enabling cross-border paperless trade in the zone.

‘Trade war’ has no winners

The report has also underscored that neither China nor the US can win a “trade war”, explaining that “both will see significant economic losses from continuing conflict.”

It also finds that implementation of mega-regional trade agreements such as the Regional Comprehensive Economic Partnership, among the Association of South-East Asian Nations (ASEAN) and its six partners – Australia, China, India, Japan, New Zealand and the Republic of Korea – could offset much of the economic losses from trade tensions.

The 2018 report estimates that implementation of such agreements could boost exports by 1.3 to 2.9 per cent and add 3.5 to 12.5 million jobs in the Asia-Pacific.

ESCAP, or the Economic and Social Commission for Asia and the Pacific is largest among UN regional commissions. Its 53 member States and 9 associate members span a geographic area from the Pacific island of Tuvalu in the east to Turkey in the west, and Russia in the north to New Zealand in the south. The region is home to nearly two-thirds of the world’s population.

In addition to countries in the Asia-Pacific region, ESCAP’s membership also includes France, the Netherlands, the United Kingdom and the US.

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