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Maintain Economy ― the longer resist, the Saudis, the better for us

The markets of Saudi Arabia continue to signal about the need for deep structural reforms in the Kingdom. The state of its financial markets over the past six months has drastically deteriorated and, apparently, not normalized, while the authorities do not leave attempts to preserve the old model. About this says Nikolay Korzhenevsky in the program «Replica».

When in the Kingdom all is not well: Saudi Arabia needs structural reform. The state of the financial markets of the country over the last six months has deteriorated. The currency market is under pressure.

Stress is evident in all segments of the financial system. Futures on the Saudi real persistently predict a devaluation on the horizon of 12-18 months. Drastic currency depreciation, however, speculators do not expect. Judging by the contracts we are talking about the value of the order of 5%. But even such a step would, in fact, the collapse of a financial paradigm of the Kingdom.

Pressure on the foreign exchange market, of course, accompanied by a rise in rates. On the interbank market Riyadh the annual money is worth 2%. It is very much as a country with a hard peg currency to the dollar are obliged to pursue the same monetary policy as the Central Bank of the United States.

Rates, respectively, with minor adjustments, should remain consistently low.

And they have been. Until last September, the cost of borrowing did not exceed 1%. Now yield twice as high. Of course, this is partly due to actions by the fed, but this factor explains only a quarter of the growth rates of Saudi. The rest lion’s share is an internal stress that market expectations about monetary policy of the Saudi authorities.

In fact, they are taking action, trying to convince the market that there would be no devaluation. First and foremost — it reduces the real offer.

Monetary aggregate M1 for the year fell by more than 5%, reflecting the reluctance of the regulator to expand the monetary base. Broader monetary aggregates M2 and M3 suggest that the demand for money have. And monetary management of the Kingdom just spoils the life of speculators. After all, the less $ in circulation, the harder it is to play against the currency.

However, with oil even at $40 per barrel for a long time to keep the defense on all fronts will not work. The Saudis reserves are now about $600 billion Official budget deficit, planned for 2016, is $87 billion. This figure is probably underestimated, as the costs of military operations are classified. According to experts, the cost is about $20-30 billion a year. Thus, the financing of budget expenditures in 2016 will spend the fifth part of gold and currency reserves.

Parallel to have to spend the cache on maintaining the peg of the real to the dollar. To accurately determine the cost of this is not yet possible, but the operation definitely will be more expensive.

Total current real Saudi reserves will last about 5 years. In real life, of course, the pad will be thinner, so as to completely drain your reserves, most likely, no one will. I think the monetary authorities of Saudi Arabia will never be able to prove to the market that he is wrong. And things go generally the scenario that is now included in rates, futures on real and so on.

An unwillingness to be unusual, painful reforms, by the way, does harm not only Finance, but also the traditional economy of the Kingdom. Over the last three years the share of oil from Saudi Arabia to South Africa imports fell from 53% to 22%, U.S. imports from 17% to 14%, China with 19% to 15%. In the latter case, by the way, volumes have been entirely replaced by supplies from Russia.

We critically monitor the developments on the markets of the Kingdom. With the current exchange rate and real rouble Russia and Saudi Arabia have roughly the same margin of safety, and we are able to aggressively compete with our middle Eastern colleagues in the oil market. By and large, the longer the Saudis are resisting the inevitable, the better for us. But to be precise: when the Kingdom would allow devaluation, the situation becomes much more interesting. First, I am convinced that it will drive the last nail in the coffin of expensive oil. If the Saudis are even ready to change course, then you need to get used to oil at $30 a long time. Secondly, it will improve the competitive position of the Kingdom and allow them to be easier to endure a price war. And thirdly, it may be the beginning of serious socio-economic changes throughout the middle East. So what are waiting for.

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