Saudi Arabia's riyal under pressure after austerity budget revealed

Saudi Arabia may be forced to devalue its currency after announcing a harsh austerity budget with spending cuts, privatisations, and hikes in taxes and prices of fuel, gas feedstock and electricity, which combined to add further pressure on global crude oil prices.

Falling oil revenues arising from the long-lasting strategy by the Opec oil producer cartel to suppress oil prices have led to the state deficit swelling to 367 billion riyals ($97.9bn) in 2015, around 15% of GDP.

Spending for the year hit 975bn riyals, which was well below forecast and so will be followed by measures such as cutting subsidies for fuel.

Riyadh may now be forced to abandon its peg to the dollar, according to the country’s former central bank asset management chief.

“If anything happens to the riyal exchange peg, the consequences will be dramatic. There will be a serious loss of confidence,” said Khalid Alsweilem.

Forward contracts on the riyal for the next 12 months have increased to their highest level since March 1999, Bloomberg noted, which reflected growing speculation that the Saudis' prized dollar exchange peg will have to be given up, devaluing the riyal against the dollar for the first time in almost three decades.

The Saudi ministry of finance said on Monday that its numerous proposed reforms included plans to “privatise a range of sectors and economic activities”.

Energy, water and electricity prices will be “gradually" lifted over the next five years, with the aim of minimising the negative effects on "low and mid-income citizens and the competitiveness of the business sector".

More immediately, Riyadh has raised gasoline prices and hiked the price of methane to $1.25 per million British thermal units and ethane to $1.75, from 75 cents for both, hitting petrochemical producers hard.

Analysts identified positive elements to the budget announcement, Reuters reported, including that the 267 riyal deficit was lower than the 400-450bn feared, and the planned cut in 2016 spending was smaller.

In the first budget under King Salman bin Abdulaziz al-Saud and his son, Deputy Crown Prince Mohammed bin Salman, Riyadh said the budget came "in light of the decrease in oil prices, the economic and regional and international financial challenges - where global economic growth has declined from its previous level - and the lack of stability in some of the neighbouring states".