“You need dollars if you’re an oil producer, you want to make sure you have dollars on your balance sheet,” said Sebastien Galy, Deutsche Bank’s director of foreign-exchange strategy, who suggests SAMA could be raising cash by liquidating riskier investments such as stocks, real estate and private equity. Holding dollars also makes sense as a hedge against the plummeting price of oil, which is priced in the U.S. currency
What will happen if Saudi Arabia is forced to abandon its currency peg from the U.S. dollar? While there will be domestic and global geopolitical consequences, the economic consequences of this move will be the most pronounced. Speculators have been waiting in line for a while and may have to continue to wait until 2017, when the currency is expected to get hit hard, rapidly. Given this potential devaluation, the coming imposition of value-added tax and excise tax and the removal of subsidies on petroleum products may lead to a huge surge in domestic inflation. A huge jump in domestic inflation will have implications for domestic political stability. There may also be a flight of capital, similar to what was witnessed in China recently, which will aggravate the devaluation. The Saudi stock market (Tadawul) will crash. Circus breakers will not help.
Regionally, the Saudi devaluation would lead to immediate devaluations in the currencies of the other Gulf countries that peg its currencies to the dollar. Inflation will spread throughout the Gulf region as its countries depend on imports for most of their needs. If this happens, it will be interesting to see how low the devaluation will go. The capital flight from the Gulf will be massive. The Gulf stock markets will crash.