GCC dollar peg to stay despite trade war risk

We view the direct impact on the GCC from a prolonged global trade dispute as negligible

Ehsan Khoman, head of Mena research and strategy at MUFG Bank

dubai — The dollar peg of GCC currencies will stay on the back of sufficient resources despite the downside risks to the global economic outlook amid escalating trade tensions, MUFG Bank said.

“We view that the direct impact on the GCC region from a prolonged global trade dispute, and ultimately the sustainability of the region’s currency pegs, as negligible,” Ehsan Khoman, head of Mena research and strategy at MUFG Bank, said.

In principle, the global trade tensions have no immediate effect on the region, which is not directly involved or implicated in the current trade disputes, Khoman said.

Dismissing growing concerns on the sustainability of GCC currency pegs as misplaced, the MUFG report said the dollar link “makes intuitive sense” given the structure of the GCC economies.

“The accumulation of large foreign currency savings during the last oil boom can be used to defend the peg. While some of these reserves have been used recently, they remain sizeable and sufficient to defend the peg even if oil prices stay low. On top of that, there is a political will to maintain the peg,” said the bank report.

The leading Japanese bank, however, warned that devaluation probability could increase sharply at lower oil prices for longer at least for two countries in the GCC — Oman and Bahrain — within two to three years.

Under the assumption that Brent oil prices stabilise at $50 per barrel levels constant for the next 10 years, the devaluation probability in Oman could reach over 80 per cent in Oman within three years. Bahrain would follow suit, as its devaluation probability would increase to 60 per cent within five years. The devaluation probabilities would start ratcheting higher in Saudi Arabia after six years and would reach 50 per cent within eight years.