|
Dubai: The Gulf countries including the UAE have no compelling reasons to change their exchange rate policies away from their peg to the dollar, a senior analyst with Moody's Investor Service said in Dubai yesterday.
"Currency appreciation will reduce the impact of imported inflation in these countries in the short term. However, the role of imported inflation is relatively small, while the expansionary fiscal policies and the domestic constraints are the primary reasons for inflation in the Gulf countries," Tristan Cooper, vice-president, Sovereign Risk Unit of Moody's, said.
For the past 25 years, GCC countries except Kuwait have had de facto fixed currency pegs to the dollar.
Prior to 2003, Kuwait's currency was pegged to a basket of currencies although it tended to track the US dollar closely. Since then, the Kuwaiti dinar has been pegged to the US dollar within a 3.5 per cent trading band. Last May Kuwait opted out of the dinar's peg to the dollar in favour of an undisclosed basket of currencies.
Inflationary pressures are expected to persist in GCC countries as domestic demand expands in response to the increasing wealth, and exchange rates should appreciate in response to these developments. However, exchange rates have been kept artificially low because of the currency pegs.
Adverse effect
According to Moody's, historically the peg has served as a strong policy anchor for the Gulf countries, which helped them to attract foreign investments. While changes in the peg could mean huge losses for the public coffers as substantial amount of the government assets are denominated in dollars, the domestic currencies would also adversely affect nascent export-oriented domestic industries.
Moody's said the impact of exchange rate change on inflation would be only short- to medium-term as the increased liquidity inflow as a result of speculative buying of Gulf currencies could flood these economies with additional liquidity that would eventually aggravate the inflationary situation.
"Any move towards a change in the exchange rate policies could lead to massive one way bets on GCC currencies that can pump up the already high liquidity exacerbating the inflationary situation," said Cooper.
Commenting on the impact of changes in exchange rate policies including a move away from GCC currencies' peg to US dollar on the sovereign ratings, Cooper said changes in exchange rates would not have any major impact on the current or future ratings.
"The possible future changes to the exchange rate policies of the member states of the GCC would not likely prove significant enough to threaten the current position or trajectory of these countries' government bond ratings," he said.
Currently, the GCC states have high sovereign ratings supported by huge fiscal surpluses and net government assets. While Kuwait, Qatar and the UAE are rated at Aa2, Saudi Arabia is rated at A1 and Oman and Bahrain are rated at A2.
|
