Continuing to link Gulf currencies to the dollar depletes monetary reserves

by **claud39** Mon Jul 27, 2020 10:26 am

[size=32]Continuing to link Gulf currencies to the dollar depletes monetary reserves[/size]

- Two Days Ago

Continuing to link Gulf currencies to the dollar depletes monetary reserves %D9%84%D9%8A%D8%AC-300x200

Analysts unanimously agree that maintaining the majority of Gulf currencies are pegged to the US dollar, which has become a heavy burden on the financial conditions in the countries of the region, in light of the decline in global oil prices and the repercussions they have been caused by the closure and foggy restrictions that still hover over the growth of the global economy.

DUBAI - Money market analysts acknowledge that Gulf countries are still able to weather their current crises with the help of their large financial reserves, especially after frequent measures in recent years to rationalize spending, reduce government support, and increase budget revenues.

This impression is coupled with the continued Gulf governments, with the exception of Kuwait, in pegging their currencies to the US dollar, but keeping that may drain more of their cash reserves in light of the Corona virus, which struck most of the vital sectors of the recession.

The sharp decline in crude oil prices has led to a growing belief that the Gulf countries, especially Saudi Arabia, may be forced to abandon the riyal peg to the dollar, after maintaining that policy for decades.

The economic repercussions of the epidemic have prompted Gulf governments, which rely mainly on oil sales to collect foreign currencies, to bite off part of those reserves to support the private sector and citizens.

Fitch Ratings Ratings experts ruled in a recent report that the Gulf countries, whose fiscal deficit is exacerbated by the drop in oil prices, will devalue their currencies, although continuing to link them to the dollar may lead to the depletion of foreign assets and debt accumulation.

Technically, pegging the currency to another currency means fixing its value and not leaving it to supply and demand in the market as it happens with some countries when you are in the process of floating the currency.

Analysts confirm that the reserves of any of the central banks in the Gulf countries are necessary to maintain the peg price and maintain it at the desired level so that the economy does not shake or be affected by external shocks as is the case at the present time.

Policymakers in the oil-exporting region have long said that pegging the dollar to the dollar is in their economies’s heavy dependence on oil and gas, but the fall in crude prices this year has added pressure to a number of pegged currencies.

"We do not expect any change in the exchange rate regimes pegged to the Gulf Cooperation Council countries in the medium term," Fitch said in her report. But she added that continuing to link "will entail a significant depletion of foreign assets or debt accumulation."

The agency stressed that Saudi Arabia, the United Arab Emirates and Qatar have sufficient resources to maintain their interconnection systems, while external support remains important to Bahrain, which its wealthiest Gulf allies pledged $ 10 billion in 2018 to avoid a credit crisis.

In the case of Oman, which has more foreign reserves than Bahrain, the fenders dissipate quickly, and future large debt payments may undermine confidence in the peg.

Saudi Arabia’s reserves fell last April about $ 20 billion, as the net foreign assets of the Saudi Monetary Agency (the central bank) fell to $ 443.7 billion, compared to March.

As for the UAE, which comes second in the Gulf states, its foreign reserves reached $ 110 billion, including cash and assets, compared to about $ 125 billion last September.

The rest of the Gulf countries are considered to be in an exportable situation, as Qatar has cash reserves of about 56.3 billion dollars, and Kuwait has a stock that does not exceed 39 billion dollars.

As for Oman’s reserves of foreign exchange and gold are estimated at 16.6 billion dollars, and finally Bahrain, which recorded a cash reserve of 3.5 billion dollars at the end of last February, without calculating its reserves with the International Monetary Fund or special drawing rights.

Gulf countries cut spending this year and rearranged its priorities, and Saudi Arabia, the region’s largest economy, increased value-added tax to boost revenues.

Fitch experts stressed that the structure of Gulf economies is appropriate to control their finances through rationalization of spending, not devaluation of their currencies.

The agency said, "The devaluation will only return with a few competitive advantages over the countries of the Gulf Cooperation Council due to the nature of their economies not diversified resources."

Social concerns are also likely to cause governments to refrain from devaluing currencies, as they may lead to higher costs of living.

"A potentially violent social response is a risk to both currency devaluation and fiscal rationalization, but fiscal policy may better be accommodated by a more gradual control," Fitch said.

The Arabs

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