Goldman Says Saudi Fiscal Adjustment Preferable to a Devaluation - Bloomberg:
A currency devaluation would be too costly for Saudi Arabia and the better option is to adapt to the oil shock through fiscal changes, according to Goldman Sachs Group Inc.
“Unlike a devaluation, fiscal policy can shift the burden of adjustment on those more capable of bearing it through, for example, taxes on luxury goods,” Farouk Soussa, a Goldman Sachs economist, said in a report. “This is not to say there would be no economic or sociopolitical costs, but we believe these would be lower than in the case of a devaluation.”
Saudi Arabia tethers its currency to the dollar and tends to move in lockstep with the U.S. Federal Reserve. While Goldman argues that the policy “has been of significant benefit to the Saudi economy over the years,” the arrangement comes under strain during oil downturns, since declines in foreign-exchange reserves erode confidence in the peg.
A currency devaluation would be too costly for Saudi Arabia and the better option is to adapt to the oil shock through fiscal changes, according to Goldman Sachs Group Inc.
“Unlike a devaluation, fiscal policy can shift the burden of adjustment on those more capable of bearing it through, for example, taxes on luxury goods,” Farouk Soussa, a Goldman Sachs economist, said in a report. “This is not to say there would be no economic or sociopolitical costs, but we believe these would be lower than in the case of a devaluation.”
Saudi Arabia tethers its currency to the dollar and tends to move in lockstep with the U.S. Federal Reserve. While Goldman argues that the policy “has been of significant benefit to the Saudi economy over the years,” the arrangement comes under strain during oil downturns, since declines in foreign-exchange reserves erode confidence in the peg.
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