Dubai, UAE – 11 October 2017:
There were high hopes that 2017 would be a turning point for oil exporting nations, as OPEC-led production cuts rebalanced the market. However, the results so far have been less than anticipated:
Richard Boxshall, Senior Economist at PwC Middle East, says:
“While the economic and fiscal outturns for the first half of the year are less than anticipated, momentum is building in key parts of the region. These signs suggest that stronger economic growth could return in 2018, so long as oil prices maintain or exceed current price levels.”
The lower for longer oil price environment has prompted renewed debate in the suitability of the GCC currency pegs. Since the mid-1980s, the Gulf currencies have all been pegged at fixed rates to the US dollar, with the exception of Kuwait which pegs to a basket of currencies.
The pegs compel central banks (including Kuwait’s) to broadly match US interest rates, even if business cycles are not aligned, as is currently the case, and so the rates don’t necessarily suit the Gulf’s economic needs and can create pressure on the pegs.
While external pressure remains within comfortable boundaries, it is also up for debate whether they remain economically suitable. Devaluations, either one-off moves or free-float regimes, would not do much to boost competitiveness in most Gulf countries. This is because of the current paucity of non-commodity exports, except in a few cases—for example Dubai’s tourism sector. For now, while the region’s economy remains dominated by oil and other commodities traded in dollars, the advantages of retaining the pegs outweigh the downsides.
Richard Boxshall, Senior Economist at PwC Middle East, added:
“A change in the currency regime is only likely to make good economic sense if and when commodities play a much smaller role in the Gulf economies as a result of successful diversification efforts. For most countries, this remains a fairly distant goal.”
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