EFTA01459611.pdf

12 January 2016 FX Blueprint: Forever Young Theme #13: Can SARdines - Stay away from SAR peg trade ▪ Saudi Arabia still has time to defend the dollar peg !Figure 1: Saudi forward points near multi-decade high but they must act more decisively on fiscal matters. !as dollar peg comes under intense pressure Wait for better levels before buying 12m USDSAR. • Reserves are nearly equal to GDP and twice the M1 130 I ti SAR 12M fwd pts (rhs) 1000 money supply. Debt was far higher and reserves 800 120 i --- SAR REER far lower during successful defenses in 1998-2003. 600 Both falling oil prices and a rising dollar suppress 110 400 Saudi inflation but outright deflation is unlikely 200 100 0 ▪ Monetary policy credibility far outweighs any -200 minimal economic gains from releasing the peg 90 -400 ▪ Other Gulf currencies (Oman), are more vulnerable 80 -600 -800 Still time to spare in Saudi Arabia 70 -1000 In recent days those sleepy Gulf dollar pegs have 94 96 98 00 02 04 06 08 10 12 14 16 suddenly awoken. The dollar's relentless rise has made Sower dune's Ow* 8locen6wg Inns LP the Saudi Arabian riyal expensive too and SAR 12m forward points have jumped to record levels (Figure 1). Figure 2: Fiscal buffers and breakeven oil prices, 2015 It turns out those large FX reserve buffers were handy after all. EM exchange rate policy is being challenged el 2015 fiscal breeiever pees (left seek) in Asia and the Middle East, with the likes of China and • Fe.cal !Mtn Nears. non: “1110 I Saudi Arabia seeing reserves depleted at rates above 269 314 200 IN Ogg 4° 1% per month. Fortunately for the USDSAR peg, Saudi 175 reserves still total $635 billion, or approximately 95% of M " GOP. Record outflows may continue for several years, 150 fueled not just by the trade deficit but also by capital • tar, 3 re, pr r...3 'or l'3 45 • outflows, and we project them to be $510bn by end-17. 100 -- Even still they will be far larger as a share of the 75 economy than China (30%) and equal to Switzerland. The IMF estimates a 5-year fiscal buffer even at the 50 • • 2015 $100 oil budget breakeven price (Figure 2). The 2s • ♦ • • • IS reverse repo rate is only 50bp and the economy is not ••• very sensitive to rate increases given low diversification. I:4A- Kyr LAC IRC IRN 01.4N AL3 SAO BUR LBY Sawa MA ileptati&es* *Spat Aft* air On1C•nriliAS1 ant Awe 1 p2, Moreover the Saudis have several as-yet untapped sources of dollar financing. One is to simply issue USD debt as in the 1990s - private external debt totals !Figure 3: Both DXY and Brent matter for Saudi CPI $68bn, a mere I0% of GDP (by contrast, South African and Turkish total external debt equals 46% and 58% of 5 ----Inverted DXY (350/DXY) r 14% Log Brent GOP, respectively). An IPO of Saudi Aramco refining 12% SA CPI (rhs) assets, as suggested by Deputy Crown Prince Mohammad bin Selman, can also raise dollar financing. LS to ri t 4 C 10% 8% • • 6% Of course the Saudis must also want to keep the peg if 4% it is to hold -- lest we forget lessons learned from the 2% SNB. The Swiss could have increased sight deposits ad infinitum but they lost the will to do so and felt the 0% CHF TWI had depreciated enough (dragged down by -2% the euro peg). DXY strength has a noticeable -4% dampening effect on Saudi inflation independent of r- -6% Brent prices - 10% DXY lower SA CPI by 1% on 79 82 85 88 91 94 97 00 03 06 09 12 15 average (Figure 3). While it is conceivable the San Dan t* Nnt. IMP Apt USISUressteat stow nom 1256 to 159Solong government will tire of SAR TWI strength as well, the Weed has ban Mod et 3 75 ohm P.A.M. authorities have recently issued strongly worded statements in defense of the peg. Deutsche Bank AG/London Page 27 CONFIDENTIAL — PURSUANT TO FED. R. CRIM. P. 6(e) DEI-SDNY-0120135 CONFIDENTIAL SDNY_GM_00266319 EFTA01459611