Gulf countries maintain their dollar pegs

Gulf countries maintain their dollar pegs

06/12/2015

Gulf countries maintain their dollar pegsDOHA – Al-Raya:

QNB Group report stressed the province of the Gulf Cooperation Council (GCC) on the pegs to the dollar for the existence of political will and commitment to maintain the link because of economic benefits to consumers and the economy as a whole, in addition to that there is ample financial resources to maintain the exchange rate peg, where the GCC countries have succeeded in accumulating substantial savings in foreign currencies During the last oil boom, and can use these savings to defend their pegs to the dollar.
The report, released yesterday these savings in many of the GCC more than 100% of GDP, noting that although some of these reserves have been used in recent months , they remain large enough to defend the currency peg, even if low oil prices remained for a few years.
The report added: Keep five of the Gulf Cooperation Council (GCC) to link their currencies to the US dollar for decades, while Kuwait remained the only Gulf Arab state that pegs its currency to a basket of currencies But even in this basket, we find that the US dollar is likely to weight. However, the recent sharp decline in oil prices have raised some expectations in the currency market about the possibility of reducing the GCC countries for their currencies. But this bet is misplaced probably for two reasons, first, is a dollar peg useful at the economic level in view of the structures of the economies of the Gulf Cooperation Council (GCC), secondly, there is supported abundance in resources Cooperation Council (GCC) to maintain this linkage of political will.
He pointed out that to realize the advantages of This linkage, it is useful to think about what would happen if the Gulf Cooperation Council (GCC) were based on floating exchange rate system. In such a scenario, the decline in oil prices will lead to a reduction in the value of local currencies. This is what happened in some major oil-exporting countries like Russia and Brazil, which has the value of their currencies fell by 71% and 88% respectively against the US dollar since mid-2014, and even some of the other oil-exporting countries, but rely less on oil exports, such as Canada and Norway have seen a big drop in the value of their currencies (25% and 42% respectively during the same period).
He pointed out that a currency devaluation that raises a big rise in inflation, given the large share of obsessed by imported goods and services in the consumer basket. Which it is confirmed by international experience, where consumers in Brazil, Russia and the prices are great inflation. As a result, central banks in the GCC countries was will raise interest rates to attract foreign capital and limit the decline in the value of their currencies and control high inflation.
The report stressed that the growth will be affected adversely almost inevitable due to the drop in private consumption as a result of reduced purchasing power of consumers due to high rates inflation. As consumption will become less attractive than savings due to higher interest rates. And this would also decline in investment as a result of rising interest rates. The increased volatility in currency exchange rates resulting from the floating exchange rate regime, inflation would have made ​​it difficult to attract foreign workers and foreign capital, and the main drivers of growth in some of the Gulf Cooperation Council (GCC).
He noted that the benefits of the current system based on the stability of the exchange rate, But some argue that the low value of the currency was able to boost the competitiveness of exports and push the wheel of growth. This is a valid argument for the economies such as Canada and Norway, but they do not apply to the GCC countries because most of its exports are limited to oil and gas, which is determined internationally and Tqoamanma their prices in US dollars. For example, it will not make the devaluation of the currency in the GCC Gulf oil barrels more attractive than the barrel of Russian oil. Of course, with the diversification of the GCC countries for their exports, can devaluation would benefit non-oil exports. While managed the GCC countries to diversify their sources of economic growth away from oil and gas, but the diversification of exports is still behind.

raya.com