TASI surges; dollar peg ‘serves economy well’

The Saudi riyal will remain pegged to the US dollar as it has served the economy well, said the Saudi Arabian Monetary Agency (SAMA) on Tuesday.

“The Kingdom is committed to keeping the riyal pegged to the dollar,” Ahmed Abdulkarim Alkholifey, deputy governor for research and international affairs at the SAMA, told Al Arabiya television.
He said the central bank was monitoring the forward market situation. Both the SAMA and independent organizations, which he did not name, believe the peg of SR3.75 to the dollar has served the Saudi economy well.
Alkholifey added that the Saudi economy is expected to grow 3 percent this year. In a report earlier this month, after annual consultations with Saudi authorities, the International Monetary Fund (IMF) had predicted the growth at 2.8 percent.
Fahad Alturki, chief economist and head of research, at Jadwa Investment, told Arab News: “The peg serves the stability of the external accounts of the Kingdom. The position of the government currently is strong compared to periods when there was speculation on the riyal such as in 2008 and in 1998.”
Meanwhile, the Saudi stock market rebounded 7.4 percent on Tuesday, encouraged by stronger oil prices and rising global bourses.
The Tadawul All-Share Index jumped to 7,543 points and was accompanied by the highest trading volume since May 2014, a positive technical signal. It followed a slide, which had taken the index down 23 percent in August, erasing over SR375 billion ($100 billion) of market value.
The rebound, which accelerated in late trading, partly eased concern about pressure on the riyal’s peg to the dollar. One-year dollar/riyal forward fell 15 percent and five-year Saudi credit default swaps, used to insure against a sovereign debt default, dropped to 100 basis points from 120, Reuters reported.
The value of traded shares exceeded SR 10 billion on Tuesday.
Commenting on the stock market, Alturki said: “The rebound in Tadawul confirms our view on the Kingdom’s strong macroeconomic position and liquidity. Elevated fiscal spending, healthy FX reserves, strong domestic demand and sound financial systems have all improved the economy’s resilience to exogenous shocks such as a decline in global stock markets and a fall in oil prices.”

Alturki added: “It is also not surprising to see short-term volatility in the market which is mainly driven by retail investors’ fear of the uncertain global economic conditions and regional geopolitical development. In our view, such volatility creates an opportunity for long-term and institutional investors.”
Fawaz H. Alfawaz, a Riyadh-based economic consultant, said: “The Saudi economy is dependent on government expenditures via the oil income. The huge adjustment in the price of oil since last summer was bound to have serious effect on the public finances. The effect on public finances will in turn affect the assets owned by the public whether in the stock market or the real estate. There was a lag in my view because of the wellbeing of the government finances. The government has ample reserves and started a modest domestic borrowing program, and its rating is very strong.”
About stock market developments, Basil Al-Ghalayini, CEO of BMG Financial Group, said: “Obviously, what happened in the Saudi and regional stock markets were driven mainly by oil prices volatility and the panic, which took place in the US and Chinese stock markets.”
However, he said: “There are positive indicators in the Saudi economy, including increases in both banking deposits and local borrowings. TASI most likely will recover before the year-end as the Saudi economy is expected to grow by 3 percent in 2015.”
Tamer El Zayat, senior economist at the National Commercial Bank (NCB), said: “The repricing of domestic shares was overdone given the intensity of the decline in such a short time frame. Obviously, events pertaining to oil and the Chinese story had weighed heavily on sentiment, yet currently at 14x price to earnings ratio, value have been created that will probably support the market around these levels.”
However, he said : “There are so many things that need to be done on the part of the regulatory and supervisory side, which involves allowing share buy-back by companies and limiting practices such as “spoofing” that involves the manipulation of orders.”
Mohamed Ramady, professor of finance and economics at King Fahd University of Petroleum and Minerals, said: “The Tadawul rebound was in line with similar rallies in the European and US market as traders had time to digest the true impact of the recent Chinese market rout and the possible impact of the Chinese rate cut. Some Saudi stocks became overly undervalued due to sharp drops and individual investors’ nervousness but the rally indicated that some long-term analysts and investors have seen value and decided to buy, aided by still healthy dividend yields for some major Saudi shares. The long-term trend is still uncertain but it is important that market participants do not get pulled by these emotional swings and focus on fundamentals.”
Other Gulf bourses closed before global markets had extended their gains. Dubai’s stock index surged 4.6% to 3,558 points, Abu Dhabi climbed 1.6% and Qatar added 3.2 percent.