Gulf Countries Sticking With USD Currency Pegs

Gulf Countries Sticking With USD Currency Pegs

$.DXY, $OIL $UUP

Gulf currencies pegged to the USD have come under pressure but Fitch said that the decision to remove the pegs will most likely be political

Gulf countries’ currency pegs to the USD are under pressure from low Crude Oil prices and a stronger USD, but there is no chance of them being abolished, ratings agency Fitch said.

Crude Oil exporters in the region including Saudi Arabia and the United Arab Emirates (UAE) have tied their currencies to the USD in longstanding arrangements that made sense when commodity prices were high and the Buck was weak.

“There is some pressure on exchange rate pegs in the region … but it is not going to happen. I really don’t see any change for these exchange rate pegs,” said Paul Gamble, senior director at Fitch Ratings, adding that abolishing the pegs would be a political rather than an economic decision.

“The USD pegs are the Key and really the only nominal anchor in these economies and the pegs are backed by huge reserves,” Mr. Gamble said at a briefing last week.

The pressure on Crude Oil producers’ pegs has not been limited to the Gulf. Kazakhstan abolished its peg to the Dollar in August, while Nigeria has already devalued 2X in the past year and is under pressure to move further.

Saudi Arabia, world’s largest Crude Oil exporter, has pegged the Riyal at 3.75 to the Buck, while the United Arab Emirates’ Dirham is fixed at a rate of 3.6725 since Y 1997.

Contracts used to indicate the direction of bets on the exchange rate have shown Gulf country currencies coming under increasing pressure. One-yr Dollar/Riyal forwards hit 12-yr highs in August, though well off highs hit around early Y 1999 when Crude Oil prices bounced around the 10 bbl level.

“We have seen much worse,” said Mr. Gamble, adding governments’ foreign currency reserves built up during times when Crude Oil prices were higher would of course be eroded.

“The central banks, they do not have the tools, and they are not preparing to move for an exchange rate arrangement that is not a peg,” Mr. Gamble added.

Fitch rates Saudi Arabia at AA but revised its outlook to negative at the end of August, citing lower Crude Oil prices and a spending increase associated with the accession of the new King .

The negative outlook signaled a more than 50% chance of a downgrade over the next 2 years, Mr. Gamble added.

“The Key reason would be due to inadequate fiscal policy response that would erode their sovereign buffers.”

Data published late in August showed that the world’s largest Crude Oil exporter has been drawing down reserves to cover the deficit, though the speed of decline has slowed in July since the government began issuing domestic debt to cover part of a budget deficit.

Have a terrific weekend.

HeffX-LTN

Paul Ebeling

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