An Analysis of Factors Affecting the Saudi Currency and Euro Currency Exchange Rates

 

Outline

a)              Introduction

b)             Saudi Currency Exchange Rate

c)              Euro Currency Exchange Rate

d)             Conclusion

The Saudi currency has been facing many problems in appreciating in value over the past few years. It is worth noting that there are many factors affecting its performance either positively or negatively. The Euro currency is also facing problems in the recent past and currently the main issue is the crisis that has started from Greece which has been predicted to weaken the Euro exchange rate in the future.

 

The current analysis for the exchange rates of the two currencies (Elvanar, 2012):

 

Graph prepared from April 2012 to October 2012

Euros (EUR) to 1 Saudi Riyal (SAR)

Source: Exchange-rates.org

 

The graph shows an appreciation of the exchange rate of the riyal is likely to be experienced in the near future as the riyal appreciated after the huge demand of oil exports of the European countries.

 

The Saudi Currency Exchange Rate

The Saudi currency exchange rate has been reported to be undervalued which is a serious issue likely to impact the Saudi economy (Zuhur, 2011). The main factors affecting the Saudi currency exchange rate can be classified into positive factors and negative factors.

 

Positive factors affecting the Saudi currency exchange rate

a)              Export of oil reserves

Saudi is one of the major exporters of oil in the world. Its oil reserves are one of the largest known in the world that can be supplied to many countries across the world. Oil forms the major earnings for the economy and given the demand for its currency, it should have strengthened against the Euro and the US dollar. Currently, both the US and the Euro Zone has demanded a huge supply of oil from Saudi after cutting the oil supplies from Iran due to the UN sanctions that have been imposed on Iran. Iran had been overvaluing its currency exchange rate far above what its own central bank had quoted and this had become very costly to the main countries that relied on Iran’s oil supply (Kalenzitia, 2012).

 

The move has been welcomed by the Saudi economy which has promised to deliver the oil at a lower price and therefore attracting many countries to buy oil from the Saudi, a major exporter of oil from the Middle East (Aldrick,2012). The positive impact is that the Saudi currency exchange rate is likely to appreciate due to the huge demand of the Saudi Riyal from other countries.

 

b)             Excellent infrastructure

Saudi Arabia has a very good infrastructure across the country and this enables many economic activities to be done much cheaply and faster which in the long run can boost the value of the Riyal due to the many exports being manufactured at low costs (Kevin, 2011).

Negative Factors affecting the Saudi Currency exchange rate

a)              Unfavorable business environment

The Saudi government is feared for lack of transparency which makes its potential of investment to be too low. This scares away many foreign investors who fear losing their money in such economy. Instead they make a few short term investments to avoid any risks associated to the lack of transparency (Mohammed, 2011). The low investment potential can restrict the appreciation of the Saudi exchange rate as compared to other countries with high investment potential.

 

b)             Religious restrictions

The Saudi economy is Islamic and therefore has been imposing many restrictions on foreigners who belong to other religions. For example, many Christians will not prefer to trade in such an economy and this has declined its potential of earning foreign exchange from trading with other countries whose majority religion is Christianity.

 

c)              Women discrimination

Saudi Arabia is well known for its stand against women and such discrimination has scared away many potential investors (Long, 2005). This is a human rights violation which therefore creates a bad image on the other countries which will not tolerate such acts. The Saudi Family Act has discriminated women from having a parental authority over the children.

 

The Euro currency exchange rate

Almost everywhere in Europe, the main issue that is being discussed is the crisis that is facing the Euro after its member economies have been heading towards a recession. Greece is the main country that has been blamed for slowing down the growth of Euro or perhaps may lead to the end of the Euro (Kadizi, 2009).

 

Positive factors affecting the Euro Currency exchange rate

a)              Combined gains of trade from the diverse markets

The EU currency is mainly influenced by the combination of the various gains and losses that result from each of the member countries. The unity has made the Euro to perform well and remain stable against the other currencies across the world. In case one country is not performing well, the losses can be covered by the gains from the other well performing economies implying that the Euro remains stable relative to other currencies.

 

b)             Positive investment potential

The Euro zone provides a better environment for investment opportunities in which many foreigners can safely invest their money for both short-term and long-term periods. Most of the governments in the Euro zone are well known for transparency across the world as compared to other countries. This makes it attractive for investors and thereby creates a huge demand for the Euro for trading purposes. In the long run the Euro exchange rate appreciates in value at a much higher rate than other currencies.

 

Negative factors affecting the Euro Currency exchange rate

a)              Unemployment benefits

The Euro is likely to fall in the coming years due to the constant grants made by the member governments to a large population of unemployed persons. The people who are working are not encouraged by the huge taxes imposed on them just to be used for payments to the unemployed people (Mevita, 2010). Instead, most investors have decided to invest in other countries to escape the high taxes imposed on them.   This has affected the demand for the Euro and thereby impacting or slowing down its growth rate. Some of the governments which are the main supporters of the payments for unemployed include Spain and Greece. This affects the Euro’s performance against other major currencies.

 

b)             Language Barriers

Due to the huge difference in languages between the member states, it has been difficult to integrate properly in various matters affecting the Euro zone. The diversity in language from each of the countries makes it unable to communicate well too many investors in those countries (Campanella, 2008). Hence, there are other more important matters that are discussed without being understood by the mass population in the other countries who may need such information for investment purposes. This puts a downward pressure on the performance of the Euro due to the slowed down trading activities.

 

c)              The European Crisis

European sovereign debts have led to the fall of its member countries into a possible recession especially Greece, Italy and Spain (Dove, 2012). The impact has been felt by the US which has been exporting about 18% mainly to the Euro-zone (Jones, 2008). In fact, the crisis has extended to the many economies that do export a larger proportion of their products to the Euro-zone. There has been a fall in demand of the exports especially from the US and China among many other countries (Bastasin, 2012). The Euro is experiencing a slow growth and a potential decline as a result of huge debt crisis from Europe (Lapavistas, 2008). Greece has been blamed by the other members due to the huge debts that it is carrying likely to put a down ward pressure on the Euro if Greece is not going to be thrown out of the Euro (Falex, 2012). Most investors in Europe have been scared of this crisis and started investing their money in US treasury bills; a factor that has led to the dollar gaining several points estimated against the Euro to be 15% in the past few months (Amadeo, 2011).

 

In comparison to the Riyal and the Euro exchange rates, analysts have pointed out that the Saudi riyal is likely to grow at a much higher rate in the future compared to the Euro due to the movement of many countries reliance on the oil exports from the Saudi Arabia government.

The Saudi Riyal has the advantage of escaping the huge impact of the decline of Euro that is likely to affect over 300 million people who use it as well as the many African economies that have been pegged on the Euro currency. The Saudi Riyal is pegged on the US dollar which makes it safe from the negative impact (Valenfisa, 2011). If the Saudi Riyal was pegged in the Euro instead of the dollar, then the Riyal could also collapse in the future if the Euro zone could fragment (Mann, 2012). The Riyal could not benefit much even if it were to be exporting its oil to other countries due to lack of confidence in the Euro (Jadwa, 2010). It is likely that the Euro zone will break itself from Greece amid fears of its collapse in trying to save Greece from its huge debts (Knight, 2011).

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