Gulf countries will stick to currency dollar-pegs, Fitch says

Gulf countries’ currency pegs to the dollar are under pressure from low oil prices and a stronger dollar but there is no chance of them being abolished, ratings agency Fitch said on Tuesday.

Oil exporters in the region including Saudi Arabia and the United Arab Emirates have shackled their currencies to the dollar in longstanding arrangements that made sense when commodity prices were high and the dollar was weak.

“There is some pressure on exchange rate pegs in the region … (but) it’s not going to happen. I really don’t see any change for these exchange rate pegs,” said Paul Gamble, senior director at Fitch Ratings, adding that abolishing the pegs would be a political rather than an economic decision.

“The pegs are the key and really the only nominal anchor in these economies and the pegs are backed by huge reserves,” Gamble said at a briefing.

The pressure on oil producers’ pegs has not been limited to the Gulf. Kazakhstan abolished its peg to the dollar in August, while Nigeria has already devalued twice in the past year and is under pressure to move further.

Saudi Arabia, world’s largest oil exporter, has pegged the riyal at 3.75 to the dollar while the United Arab Emirates’ dirham is fixed at a rate of 3.6725 since 1997.

Contracts used to indicate the direction of bets on the exchange rate have shown Gulf currencies coming under increasing pressure. One-year dollar-riyal forwards hit 12-year highs in August, though well off highs hit around early 1999 when oil prices bounced around the $10 a barrel level.

“We have seen much worse,” said Gamble, adding governments’ foreign currency reserves built up during times when oil prices were higher would of course be eroded.

“The central banks – they do not have the tools, and they are not preparing to move for an exchange rate arrangement that is not a peg,” Gamble added.

Fitch rates Saudi Arabia at AA but revised its outlook to negative at the end of August, citing lower oil prices and a spending increase associated with the accession of a new king .

The negative outlook signalled a more than 50 per cent chance of a downgrade over the next two years, Gamble added.

“(The main reason) would be due to inadequate fiscal policy response that would erode their sovereign buffers.”

Data published late in August showed that the world’s largest oil exporter has been drawing down reserves to cover the deficit, though the speed of decline has slowed in July since the government began issuing domestic debt to cover part of a budget deficit.