GCC Currency Union Pact Signed By Remaining Participants

GCC Currency Union Pact Signed By Remaining Participants

The remaining four Gulf countries working to create a currency union signed a pact on 7 June, indicating that the new currency would be pegged to the dollar. The four are Saudi Arabia, Kuwait, Bahrain and Qatar, after UAE pulled out recently citing the decision to base a GCC central bank in Saudi capital Riyadh (MEES, 25 May), and Oman opted out in 2006. With the exception of Kuwait, which abandoned its dollar peg in favor of a dollar-weighted basket of currencies, all the other GCC countries (including those that left the monetary union) have their currencies pegged to the dollar. UAE Minister of State for Foreign Affairs Anwar Muhammad Gargash reiterated that the UAE stands by its decision to withdraw, after Foreign Minister Shaikh Abd Allah bin Zayed Al-Nahayan had suggested last month that the door was not closed. Meanwhile, poorer neighbor Yemen wants to integrate its economy with the GCC and the country’s Foreign Minister, Abu-Bakr al-Qirbi, has asked for the drawing up of a roadmap to accomplish this aim. He concedes that preparation will take time, but notes that EU accession has also been a lengthy process for some European countries.

GCC Pressured, But Well Placed To Ride Out Turbulence, Says S&P

The outlook for all GCC sovereigns is currently stable, but significant challenges this year include managing the impact of the downturn in the global economy and the fall in crude oil prices, upon which most GCC economies are highly dependent (see story below), said S&P in its fourth annual Gulf Cooperation Council Credit Surveydated June 2009. The reduction in global liquidity has reduced the ability of GCC entities to raise financing in international capital markets, particularly for corporates and banks and a similar pattern is evident in borrowing by GCC entities from international banks (see chart). Both forms of financing dipped towards the end of 2008 and in 2009 will remain at lower levels because risk appetite will stay subdued, notwithstanding recent successful Abu Dhabi and Qatar sovereign bond issuances, said S&P.

Debt Issuance By GCC Governments, Corporates And Banks

Source:Bank of International Settlements (BIS).

Almost three-quarters of the issuance in the chart and one-half of the bank borrowing was done by UAE-based entities and the UAE, and particularly Dubai, has experienced the most severe reversal in domestic liquidity conditions since mid-2008. While the credit crunch has hit the liabilities side of countries’ balance sheets, the fall in global asset valuations, including in domestic GCC capital and real estate markets, has had a significant and detrimental effect on the value of their assets, resulting in lower net asset positions and higher contingent liabilities for GCC sovereigns. Given the combination of low oil prices and a decline in production as a result of OPEC’s quota reductions, S&P expects that the average government account balance will barely be positive in 2009, compared with a GCC surplus of around 23% in the previous three years. S&P predicts that Saudi Arabia will fare the worst, with a deficit of 7% of GDP. For the GCC, average inflation is expected to come down from 10% in 2008 to 5% in 2009-11, forecasts S&P.

However, the weakening fiscal position is not necessarily a harbinger of deteriorating creditworthiness, said S&P, noting that in most cases GCC countries have opted for an expansionary fiscal policy in order to counter the impact of the global economic downturn. GCC governments have exceptional fiscal space to implement such policies, with S&P estimating that Abu Dhabi and Kuwait could sustain a 10% GDP fiscal deficit for just over 30 years, Saudi Arabia could manage it for over 25 years, Qatar around seven years, Oman five years, and Bahrain just under five years. For Qatar this belies the sovereign strength, given that previous surpluses have been re-invested in productive infrastructure, particularly LNG expansion. In conclusion, S&P considers that GCC countries are well placed to ride out the turbulence thanks primarily to their exceptional fiscal capacity to pursue counter-cyclical expansionary policy. The non-oil economy, an important engine for future employment growth and diversification, remains a key priority for most, and robust government expenditure will ensure that it is in large part shielded from the global economic downturn, predicts S&P.

Correction:In last week’s issue (MEES, 8 June), the report titled Saudi Banks Concerned By Troubled Domestic Companies should have said that Standard & Poor’s lowered its ratings of Saad Group and related entities to D/D and then subsequently withdrew them on 2 June, not 3 June as originally stated.

Copyright MEES 2009.