GCC currency pegs remain resilient

The UAE dirham has been pegged to the greenback since 1997.

Currency pegs across the GCC remain resilient despite the drop in oil prices as the region's considerable reserves will ensure that member states continue to withstand pressures on the peg, but economic diversification and sustained reform measures are crucial, said analysts.
Saudi Arabia holds $500 billion in fiscal reserves out of Middle East and North Africa's total of $875 billion.
Dr Paul Wetterwald, chief economist, Indosuez Wealth Management business line, said Saudi Arabia is able to rely on its reserves that remain considerable and amount to more than two years' worth of imports.
"This should allow the authorities to withstand any pressure on the peg, but should not pause any diversification efforts and various reforms that the country has been active with under the crown prince Mohammed bin Salman. This is because the country's currency is historically pegged to the dollar and cannot afford to persistently run current account deficits," he said.
Dr Wetterwald said Saudi Arabia's current account went from a surplus to a deficit of 8.3 per cent in 2015. More recently the country avoided to run a twin deficit in first quarter this year as the Saudi Ministry of Finance disclosed a budget deficit of four per cent of GDP, and the rebound in the oil price helped to get the current account back in surplus.
Exports gained and imports declined due to weak domestic demand, resulting in a $6 billion surplus mainly due to oil-related exports receipts. Despite this, the capital account displayed large outflows reflecting possibly reallocation of sovereign wealth.
Saudi reserves continued to decline over the January-May 2017 period and stand now at $499 billion - a decrease of $247 billion since its August 2014 high. Bahrain's surplus shrunk to 3.4 per cent of its GDP in 2014 and Kuwait's collapsed to 7.5 per cent in 2015.
"A country's current account balance gives us a hint about the resilience of its currency in times of crisis. The stronger is the balance, the less need there is to draw into reserves to defend the currency," said Dr Wetterwald.
Most analysts expect the GCC to stick to its policy of pegging against the dollar even as low oil prices and a strong dollar are putting pressure on its currencies.
Ever since Kuwait in 2007 returned to a more flexible exchange rate maintained between 1975 and 2003, pegging the dinar against a more diversified basket of currencies, speculation has been ripe about other GCC states following suit and de-pegging from the dollar.
The Omani real has been pegged to the greenback since 1986, the UAE dirham since 1997, the Qatari and Bahrain dinar since 2001, and the Saudi riyal since 2003.
According to analysts at Moody's, the fall in the oil price led to an aggregate current account deficit of -1.8 per cent of GDP in the GCC through 2016, compared to an average surplus of close to 18 per cent during the 2005-2014 period. Countries with high external breakeven oil prices like Oman, Bahrain and Saudi Arabia have been most affected, whilst Kuwait and the UAE have managed to return to small surpluses.
Growth in GCC countries is projected to slow further from 1.9 per cent in 2016 to 1.6 per cent in 2017, reflecting the drop-in oil production resulting from the November 2016 Opec agreement. Non-oil growth is expected to pick up to 2.4 per cent in 2017 and 3.0 per cent in 2018 as oil recovers and fiscal consolidation eases, an IIF report indicated.
The US Fed hiking cycle is another concern for the GGC financial authorities, putting additional upward pressure on GCC lending rates.