Massive assets boost Saudi riyal

Saudi Arabia controls in excess of SR2 trillion in net foreign assets and this provides a good cover for its massive imports and keeps its currency strong, the Gulf Kingdom’s largest bank said on Tuesday.

National Commercial Bank (NCB) estimated Saudi Arabia’s total net foreign assets at around SR2,100 billion, controlled most by the Saudi Arabian Monetary Agency (SAMA) as well as banks and other institutions.

In a study sent to Emirates 24/7, NCB noted that the management of foreign exchange reserves is an important indicator when assessing the Kingdom’s monetary policy and consequently the stability of its currency.

“This is significant for facilitating foreign trade activity and reflects on Saudi Arabia’s ability to cover payments for its largely import-oriented economy,” it said.

“Given the Kingdom’s marginal propensity to import, and its magnitude of foreign trade, some of the resulting inflation in the Kingdom, at 6.1 per cent in August 2010, is attributable to imports due to rising commodity and material prices, reflecting in the increase from last year’s August inflation of 4.1 per cent….we expect that the Saudi riyal will continue to remain strong and stable, thus minimising the Kingdom’s vulnerability to external shocks.”

The report showed Saudi Arabia’s net foreign assets were higher by nearly 13.3 per cent a year ago and around 29 per cent above the forecast nominal gross domestic product of about SR1,626 billion in 2010.

“The inherent strength of the riyal vis-à-vis its stability can be determined by taking total net foreign assets as a percentage of the broadest aggregate measure of money supply (M3) in the economy,” NCB said.

“Therefore, the Kingdom’s rule of 100 per cent convertibility of local currency it holds is reinforced by the fact that for every SR 100, the government had covered 209.4 units in foreign exchange reserves in August 2010, a 10.5 per cent increase from its 189.5 units to each riyal it covered in August 2009.”