Saudi Arabia and other Gulf Cooperation Council (GCC) states are expected to maintain their currency pegs to the US dollar over the next decade, Fitch Solutions said in a recent report.
For the hydrocarbon exporting GCC states de-pegging carries only limited benefits in terms of boosting external competitiveness, while unhooking the link could result in “severe repercussions” on investor sentiment towards the region likely triggering sharp capital outflows, the report said.
“This would, in turn, result in depreciatory pressures, which would raise the costs of much-needed imported goods and fuel popular discontent,” the report said.
The GCC governments also have the ability to defend their respective pegs, especially as recovering oil prices have a positive impact on the bloc’s external and fiscal position, Fitch added.
“While Bahrain and Oman are in a much weaker position, we believe that other GCC members would come to their rescue were these countries facing a forced devaluation, given potential contagion effects,” it said.
Central banks across Gulf states will also continue to actively support dollar pegs over the coming decade.
Due to the ongoing recovery in oil prices current account balances returned to surplus in 2017 in Saudi Arabia, Kuwait and Qatar, while the UAE did not experience a deficit even when oil prices were lower, the report said.
With further gains in reserves expected, central banks’ ability to defend their pegs remains supported.
Meanwhile, the ongoing diversification strategies being implemented in Saudi Arabia and other Gulf countries are expected to gradually change the structure of the GCC economies over the coming decade, but the change will not be rapid enough to undermine the rationale for keeping pegs to the US dollar over the 10-year forecast period.
“We still expect hydrocarbons and re-exports to account for the majority of exports, especially given that countries such as Oman and the UAE are seeking to become logistics hubs in the region,” Fitch said.
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