GCC states in strong position to defend currency pegs: S&P

Muscat - 

Despite economic slowdown and rising debt levels in recent years due to lower oil revenues, the GCC governments are still in an extremely strong position to support the currency pegs with US dollar on the back of central bank reserves and governments’ external assets, according to S&P Global Ratings.

‘In our view, all of the GCC pegs will remain in place over the medium term. GCC sovereigns’ ability to support the pegs differs widely, but we believe their pegs will hold, including in Bahrain and Oman. As for Kuwait, Qatar, and the UAE, Oman’s gross central bank reserves are more than sufficient to defend the pegged exchange rate’, S&P said in a report released on Monday.

The global ratings agency said that monetary policy flexibility is limited across the GCC because of the prevalence of exchange rate pegs to the US dollar. ‘That said, the pegs have provided a stable nominal anchor for inflation, particularly because the economy’s main export, oil, is typically priced in dollars. The transmission of monetary policy is also constrained by underdeveloped capital markets’.

S&P said the pegged exchange rates have provided market participants with a level of predictability regarding the value of their investments in the GCC. However, the sustainability of the pegs has come into question.

‘When we include both central bank reserves and our estimate of government liquid external assets, we see that GCC governments are in an extremely strong position to support the pegs, with the exception of Bahrain’, S&P said.

It said Oman’s reserves provide close to 100 per cent coverage of the monetary base and close to three months’ coverage of current account payments. However, it said Bahrain is in a much weaker position, with less than 50 per cent of monetary base coverage and only one month of current account payments.

S&P recently revised its outlook on Oman to ‘negative’ from ‘stable’ and affirmed the sultanate’s ratings at ‘BB/B’. The ratings agency said its future rating actions on Oman largely depend on the policy actions of the government.

‘For example, faster fiscal consolidation would result in slower accumulation of external debt, supporting our external assessment. We could lower our long-term ratings on Oman if fiscal deficits and related external financing do not narrow significantly, with the rating inching closer to that on Bahrain. At the same time, we continue to view Oman as having credit strengths above and beyond those of Bahrain. Changes in oil prices and production could also influence each country’s macroeconomy’, S&P said.

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