Gulf states looking at depegging or revaluing their currencies will find the impact is largely positive for the economy, senior economists told ArabianBusiness.com on Monday.
US investment bank Merrill Lynch said on Sunday that the UAE and Qatar would probably depeg from the US dollar and move to a currency basket in the next few months, after the US gave the go-ahead in order to fight inflation.
All Gulf states, bar Kuwait, peg their currencies to the dollar, which forces central banks to follow US monetary policy and limits their ability to bring down inflation, which has soared to record highs across the Gulf.
“I think there would very few losers from an adjustment because the region is so import-dependent and because such a large proportion of the population is expatriate and remitting much of their income,” said Simon Williams, a Dubai-based economist at HSBC.
“Overall, I think it will be positive if we see any kind of monetary policy tightening,” said Marios Maratheftis, regional head of research at Standard Chartered.
“If something is better for the economy as a whole, it’s better in general for all.”
Merrill Lynch said in their report ‘US Green Light for the GCC’ that whilst the UAE and Qatar would make the currency-basket move in the next few months, Saudi Arabia was unlikely to follow until late next year.
Citing a US Treasury report on the GCC, the investment bank said the US government had become more confident about the outlook for the dollar and therefore did not necessarily need Gulf support for its currency.
“We believe the inclusion effectively gives the GCC countries the green light for change,” the bank said.
However, regional economists are divided over both whether and when any of the Gulf states will either revalue their currencies or drop the dollar-peg.
“Our view has always been consistently that the region is in need of monetary policy tightening in order to manage the [economic] boom more effectively,” said Maratheftis about Standard Chartered’s position on Gulf currencies.
“The challenges we’re facing in the region are different to the challenges that the US economy is facing. Monetary policy is extremely loose which is leading to inflationary pressures.
“We think the best way of dealing with inflationary pressures is by changing the dollar-peg ideally. This would be the best solution but as the second-best solution we think a revaluation would also help.”
Others said that neither the UAE nor Qatar were likely to move to a basket of currencies in the next few months.
“I think it’s improbable in a 12-month time horizon,” said Williams. “I don’t think the Gulf states are yet persuaded by the arguments in favour of change.
“They are expecting a dollar recovery in the second half of the year to ease some of them pressures they have faced as a consequence of weakness over the last couple of years.”
Investors piled into Gulf currencies from September on speculation that some of the states in the world’s biggest oil-exporting region would follow Kuwait and sever their links to a dollar that was tumbling to record lows against the euro and other major global currencies.
“The US treasury in its report mentioned the Middle East and it has mentioned the GCC countries in particular,” said Maratheftis, cautioning against over-excitement in the region’s markets.
“What people have failed to realise is that there regular publications of this report – the previous report was published in December last year and they said exactly the same thing.”
Outside the region, Maratheftis perceived a Gulf depeg from the dollar could positively impact the greenback.
“I think the impact on the dollar would prove to be positive,” he said. “Maybe initially there might be some negative sentiment and it might put the dollar under some moderate pressure, but I think this will be short-term.”
Marios said that global economic imbalances were the main reason behind the dollar’s fall in the past seven years.
“Now we’re seeing global unbalances widening as we speak, and I think stronger Middle East currencies will help deal with these global imbalances,” he said.
‘We have massive current account surpluses here [in the Gulf]. A stronger currency would help with the unwinding of these global imbalances and should hence be a positive for the dollar over the medium-term.”
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