Structural challenges continue to constrain GCC sovereign ratings, Standard & Poor's has said in a report.
GCC (Gulf Co-operation Council) sovereign ratings would likely have been higher if not for two overarching structural challenges namely, limited monetary policy flexibility and underdeveloped political and institutional frameworks, S&P said. "There are still particular shortcomings in the effectiveness and predictability of policymaking in the GCC," the rating agency added.
"Weaknesses" include the quality of policy debate; the strength and depth of institutions; transparency of decision-making; data monitoring and reliability of information; legal frameworks and the rule of law; and succession risks. These partly reflect the relative short history of the GCC nation states and the government's role as wealth distributor, creating less urgency for institutional depth, S&P said.
Under S&P criteria, the lack of monetary policy flexibility is a key ratings constraint for the GCC countries, particularly in terms of exchange rate regimes, the credibility of monetary policy, and the effectiveness of the transmission mechanism via the financial system and capital markets.
The channels and instruments available to the authorities to address economic imbalances and to cope with economic shocks are limited.
Fixed exchange rate regimes, the lack of independent monetary policy, and weak local currency instruments largely constrain the transmission of policy, the global rating agency said.
These attributes and open capital markets largely shape GCC monetary frameworks. Nevertheless, the countries' open economies with their easy flow of goods and labour have largely underpinned the fixed exchange rate as a credible nominal anchor.
The monetary union that was initially envisaged for 2010 has been delayed in part because Oman and the UAE have opted out.
The remaining members have established the GCC monetary council, a precursor to a regional central bank, which is tasked with unifying the monetary systems of Saudi Arabia, Kuwait, Qatar, and Bahrain.
Currency pegs appear to have been successful, but the stabilising effect comes at a cost. The inability to pursue independent monetary policy means that authorities have fewer tools to deal with economic imbalances and shocks, the report said.
Due to the oil windfall since 2005 and the decoupling of the GCC's business cycles from the US inflationary pressures have become particularly difficult to contain.
Governments can use indirect monetary instruments and macro-prudential measures to manage liquidity, however S&P views these instruments as insufficient particularly when an economy is faced with imported, demand-pull inflation, as well as supply-push inflation as was the case in the GCC during 2007-2008.
© Gulf Times 2013
