Riyal revaluation could boost Saudi bourse

A decision by Saudi Arabia to revalue its riyal against the ailing US dollar could briefly boost the Kingdom’s bourse but it could later suffer from a setback because of an expected capital flight, a key Saudi investment company said yesterday.

A revaluation, which has been strongly speculated over the past year, could also hit the foreign assets of Saudi banks but would benefit foreign banks with riyal deposits in the country’s banking sector, the Riyadh-based Jadwa said in a study.

Saudi exporters and companies listed on the Tadawul stock exchange with investments abroad will be among the main losers from an appreciation of the Kingdom’s currency while retail, transport, real estate and telecom importers will be the main gainers, it said.

“If there were a change in the currency, the impact on the stock market would be as follows: after an initial bounce, we think a revaluation would have a negative impact, as it makes investment in foreign markets relatively cheaper,” it said.

“Listed companies that import would benefit from a revaluation; those that have foreign earnings may lose out… as rising inflation is eroding consumers’ disposable incomes and generating uncertainty for local companies, it is likely that the Tadawul All-Share Index (TASI) would jump in the event of a revaluation.

“After this immediate euphoria has evaporated, there is likely to be an outflow of funds. This is because reducing the number of riyals necessary to buy a unit of foreign currency makes investment in foreign currency denominated assets more attractive,” it said.

The study about Saudi Arabia’s economy and possible currency revaluation said a 15 per cent appreciation of the riyal against the dollar would make the riyal price of shares listed on US markets 15 per cent cheaper.

Some foreign investors may also choose to exit the Saudi market after making a one-off exchange rate gain from the revaluation, the study added.

Jadwa ruled out an imminent revaluation of the riyal but said any appreciation in its value against the dollar in the future would benefit the firms and sectors that import from foreign markets as the revaluation would lower the cost of their imports.

It expected those importers to increase their profit margins although they will come under pressure to pass on the impact of a revaluation to final consumers.

“Retail and transport are the most import-dependant sectors on the Tadawul. Companies undergoing major expansion programmes where the necessary technology comes from abroad, but final product is sold domestically, should also benefit. These include telecoms and real estate.

“Performance of all companies with foreign earnings will worsen in the event of a revaluation, as these earnings will be worth less when converted into riyals and recorded in their financial statements,” the study said.

It said sectors focused on exporting, such as petrochemicals and some manufacturers from the investment, construction and agricultural sectors, would be most affected. In addition, travel agents and other companies reliant on foreign spending would be hit.

“A revaluation would lower the value of commercial bank foreign assets and raise the value of foreign liabilities in addition to lowering the value of returns on foreign investment when reported in riyals. Insurance firms would see a similar impact on their balance sheets, as would investment companies with large foreign holdings,” it said.

“The energy and utilities, cement and agricultural sectors would be little affected by any revaluation of the riyal as the bulk of their inputs (power, limestone, water and labour) are sourced from within the Kingdom and their output is consumed domestically.”

According to the report, foreign banks have largely increased their riyal-denominated deposits with Saudi banks in anticipation of a revaluation decision.

“But speculation of a revaluation, which heightened during 2007 and early 2008, has not prompted any measures by Saudi Arabia’s commercial banks to cut their foreign assets.”

Figures by the Saudi Arabian Monetary Agency, the Kingdom’s central bank, showed such assets grew from SR129.7 billion (Dh127bn) at the end of 2006 to around SR147.7bn at the end of 2007. They maintained their upward trend this year albeit slowly to reach SR151.9bn at the end of May.

Foreign liabilities, which include mainly deposits by foreign banks with Saudi banks, jumped from SR59.1bn at the end of 2006 to SR105.2bn at the end of the last year.

The deposits continued their rapid growth to reach one of their highest levels of nearly SR138.2bn at the end of May.

 

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