MOST observers expect OPEC to leave production unchanged at its meeting on December 4th. If it does, there will be no end in sight for low oil prices. Saudi Arabia’s strategy of opening the taps to put producers with higher costs out of business is proving painful. Prices are about half what they were a year ago. In 2013 the Gulf countries had a huge combined current-account surplus of 21.6% of GDP. But the IMF expects this to shrink to a deficit of 2.5% of GDP next year, thanks to the plunge in the value of their main export.
In October alone, Saudi Arabia’s central bank spent $7 billion of foreign reserves financing the kingdom’s deficit. If it ran short, it would have no choice but to abandon the riyal’s long-standing peg to the dollar. Sure enough, jitters about the peg are discernible in the futures market. On November 24th the price of buying a riyal in a year’s time fell to its lowest level since 2002. Futures for other Gulf currencies have also sagged.
There is little reason for Gulf countries to devalue if they can avoid it. Their main export is priced in dollars,...Continue reading
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