Currency devaluation would be too costly for Saudi Arabia - Goldman Sachs

Omkar Godbole FXStreet Contributor

Saudi Arabia can adopt to the oil price slide through fiscal changes as currency devaluation would be a too costly option, analysts at Goldman Sachs said, according to Bloomberg.

“Unlike a devaluation, fiscal policy can shift the burden of adjustment on those more capable of bearing it through, for example, taxes on luxury goods,” Farouk Soussa, a Goldman Sachs economist, said in a report.

Saudi Arabia's currency, the riyal, is pegged to the U.S. dollar for decades and the Kingdom runs its monetary policy in lockstep with the Federal Reserve.

Key quotes

An FX devaluation would have to be very large in order to generate an income effect sufficient to reduce external imbalances.

The magnitude of the devaluation of the riyal would have to be very large in order to be of material benefit to external and fiscal imbalances in a $30 oil price scenario. The most obvious alternative is an adjustment in fiscal policy.

Brent prices crashed to $16 in May as the demand destruction caused by the coronavirus pandemic threatened to fill up storage tanks across the globe.

Author

Omkar Godbole

FXStreet Contributor

Omkar Godbole, editor and analyst, joined FXStreet after four years as a research analyst at several Indian brokerage companies.

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