GCC’s pegged exchange rates to remain

S&P Global Ratings (S&P) has said that the GCC’s pegged exchange rate regimes will remain in place.

With the exception of Kuwait, the GCC states have currencies that have maintained long-standing pegs to the US dollar. The Kuwaiti dinar is linked to an undisclosed basket of currencies that is understood to be dominated by the US dollar.

Low oil prices typically come with growing speculation that the currency regimes in the GCC could change. In the past countries have been able to defend their currencies with their substantial reserves, and S&P said in a report on 1 June that it expects this to be the case in 2020.

“We believe that GCC sovereigns can maintain their pegged exchange rates because we view all of them as having sufficient access to foreign currency assets, or external financial support, to meet pressures on their exchange rates,” said S&P credit analyst Trevor Cullinan.

First and second-tier reserves

S&P added in the report that two distinct groups have emerged from its analysis of reserves adequacy.

“Kuwait shows clear strength in terms of the availability of reserves to cover the monetary base and current account payments over the next four years,” the report said. “Qatar, the UAE and Saudi Arabia also show significant strength.”

Qatar, the UAE and Saudi Arabia have raised debt this year to cover their budget deficits. In April, Riyadh said that it could issue SR220bn ($59bn) of debt this year and withdraw SR120bn of reserves as the kingdom combats the economic disruption caused by the Covid-19 pandemic.

“In the second tier, we have Bahrain and Oman, sovereigns that have a lower level of government external liquid assets,” the S&P report added. “One common assumption is that three months’ coverage of imports is adequate to protect against external shocks.”

In late March, S&P lowered its outlook for Bahrain to stable from positive and has affirmed its B+/B long- and short-term sovereign credit ratings.

“We do not view Bahrain, on its own, as having sufficient foreign currency resources to meet potential pressures on its exchange rate,” the report said. “However, we expect the Bahraini peg to remain in place because we continue to factor further GCC financial support to Bahrain should financial pressures mount, on the exchange rate peg, or otherwise.”

Manama signed a $10bn financial aid agreement with Saudi Arabia, the UAE and Kuwait in 2018. It also committed to a Fiscal Balance Programme (FBP) in 2018, which aims to eliminate the country’s budget deficit by 2022 by delivering annual fiscal savings of BD800m ($2.1bn).

Bahrain has demonstrated the ability to raise debt this year. In May, it issued a $2bn dual-tranche bond comprising a sukuk and conventional bonds.