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Moody's: potential exchange rate changes no threat to Gulf states
Moody's Investors Service said the potentially negative effects of possible future changes to the exchange rate policies of the member states of the Gulf Cooperation Council would not likely prove significant enough to threaten the current position or trajectory of these countries' government bond ratings.
The council's six member states include Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates. For at least the past 25 years, all but Kuwait have had de facto fixed currency pegs to the dollar, with the Kuwaiti dinar pegged to the dollar within a ±3.5% trading band since 2003. The agency said this system has generally been successful because it has provided a strong policy anchor and thereby fostered financial stability in a highly volatile external environment.
However, a rise in inflation has fuelled speculation that Gulf Cooperation Council governments may be reconsidering their exchange rate policies. Officially, the council plans to unify its members' currencies in 2010, but the council's exchange rate plans have recently been thrown into doubt by conflicting statements from officials. Probable options include the prospect of Gulf currencies appreciating and, potentially, the adoption of more flexible exchange rate regimes, Moody's said.
Despite the potential downside risks of a future change in exchange rate policy, the agency said it is unlikely that such a change would alter the current level or trajectory of Moody's sovereign ratings of the six member states because the strong and improving financial strength of council governments gives them considerable room for maneuver on the policy front.
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