Oil Slide Echoes 2008 Peg Pressure for Nigeria to Saudi

By Ye Xie and Paul Wallace  

The sharpest drop in oil prices since 2008, coupled with a surge in the dollar, are testing the resolve of energy-producing nations to defend their currency pegs.
Even Saudi Arabia, whose $745 billion reserves may allow it to maintain the link for years, is feeling the pressure of speculators betting against its currency. Nigeria intervened in foreign-exchange markets to bring the naira back from a record low last week, while economists surveyed by Bloomberg expect Venezuela to capitulate on its dollar peg by year-end.
For the dwindling number of nations whose exchange rates are linked to either dollars or a basket of major currencies, breaking those ties would raise the
odds of inflation accelerating too fast. It would also take away a steadying influence on their economies.
“Countries operating with a currency peg, particularly oil exporters, are suffering from losing export earnings, weakening their ability to defend the peg at a time when emerging-market currencies are under pressure from a stronger dollar,” Stuart Culverhouse, the chief economist at London-based frontier-markets specialist Exotix Ltd., said by phone on Nov. 6. “It magnifies the problems they’re having.”

Biggest Export

Oil and natural gas account for at least 85 percent of the exports of Saudi Arabia, Nigeria and Venezuela, while Russian energy sales account for more than half the government’s revenue, according to the U.S. Energy Information Administration.
Though it didn’t have a formal peg, Russia, the world’s largest energy exporter, this week ended a policy of maintaining the ruble in a fixed band versus a basket of dollars and euros.
Crude oil fell almost 30 percent since mid-June to a three-year low of $75.84 per barrel last week, according to generic prices in New York compiled by Bloomberg.
At the same time, the dollar is soaring on the prospect of higher U.S. interest rates. Bloomberg’s Dollar Spot Index, which tracks the greenback against 10 major peers, rose 9 percent since June to a 5 1/2-year high of 1,099.28 on Nov. 7.
Nigeria may need to devalue the naira after presidential elections in February, Goldman Sachs Group Inc. said in a Nov. 3 report. Policy makers target a rate for the naira at twice-weekly auctions of 155 per dollar, plus or minus 3 percent.

Expensive Defense

In defending the fixed-exchange rate, Africa’s largest oil producer has reduced its foreign-currency reserves to a four-month low of $38 billion. The naira weakened to a record 172.78 per dollar on Nov. 7 before intervention helped it rebound. Even so, it’s fallen for the past three days on concern Nigeria’s central bank will no longer be able to defend the peg, and was at 169.25 as of 10:55 a.m. in London.
Those concerns led Phillip Blackwood, a money manager at EM Quest Capital LLP in London, to sell his holdings of Nigerian domestic bonds in recent weeks.
“There’s so much pressure,” Blackwood, who manages $3.3 billion of emerging-market assets, said by phone on Nov. 7. “They’re not willing to defend. It costs too much.”
Ibrahim Mu’azu, a spokesman for Nigeria’s central bank in Abuja, said last week that no decision has been taken on whether to devalue. So-called 12-month non-deliverable forwards on the naira weakened to a record 199.50 per dollar on Nov. 10, and were at 197.50 today, suggesting traders expect the currency to decline about 17 percent in that period.

Saudi Arabia

With the world’s third-largest foreign reserves after China and Japan, Saudi Arabia is more than capable of defending the 3.75-per-dollar peg that’s existed since the 1980s, as are other energy exporters in the region, said Jason Tuvey, an economist at Capital Economics Ltd. in London.
That hasn’t stopped traders from testing the central bank’s resolve. The riyal fell to 3.7536 per dollar on Oct. 21, the weakest level since 2009, before rebounding to 3.7519 today.
Implied one-year volatility, which reflects bets on future price swings, jumped to a 3 1/2-year high of 0.81 percent that day last month, and have since eased to 0.7, data compiled by Bloomberg show. That’s still almost double the 0.38-percent average since the end of 2011.
The Saudi Arabian Monetary Agency in Riyadh didn’t immediately respond to questions sent by e-mail and fax outside office hours yesterday.

‘Enormous’ Reserves

Mideast nations have “enormous currency reserves that certainly provide plenty of buffer, even if oil prices fall further,” Tuvey said by phone on Nov. 7. “I don’t think there’s any particular pressure on their dollar pegs.”
Currency pegs haven’t been under such pressure since the global financial crisis of 2008, when oil prices plunged more than 75 percent in the second half of that year and the dollar surged as investors sought safe assets.
Devaluations sent the naira tumbling more than 20 percent from November 2008 to February 2009, while Venezuela cut the value of the bolivar by half in January 2010.
Fixed exchange-rate regimes were swept away during the Asian crisis of the late 1990s, when speculators selling their currencies forced nations from Thailand to South Korea to abandon their links with the dollar.
Now, currency pegs are largely confined to major oil producers in the Middle East and the world’s most troubled developing economies. While such systems have their advantages, they also deprive central banks of the option of letting their exchange rates absorb swings in oil prices or slowing growth.
In Venezuela, the median forecast of five strategists surveyed by Bloomberg is for the official exchange rate to weaken to 12 bolivars per dollar by year-end, from 6.3 now.
The South American nation operates a system of official and unofficial rates which, with the decline in oil and gains in the dollar, are increasingly divorced from black-market prices.
“It’s a perfect storm for oil-exporting countries,” Nicholas Spiro, the managing director of London-based consultancy Spiro Sovereign Strategy, said yesterday by phone. “The history of currency crises of the last 20 years or so has shown that currency pegs are particularly vulnerable.”