Spiralling inflation and the widely anticipated changes in the Gulf currency regimes will not affect GCC's creditworthiness, a leading ratings agency said yesterday.
The observation by Standard & Poor's Ratings Services came amid growing speculation that the GCC states will revalue their currencies or follow Kuwait and change their exchange rate regimes.
However, the UAE yesterday indicated that it would continue its dollar-peg by cutting interest rates again for the third time in two months in line with a similar move by the US Federal Reserve.
The UAE Central Bank cut the six-month and nine-month certificate of deposit rates by 10 basis points to 4.40 per cent and 4.30 per cent respectively, the 12-month rate by 15 basis points to 4.15 per cent and the 18-month rate by 20 basis points to 4 per cent. It left the one week, one-month and three month rates unchanged.
In its report titled "Balance sheets bolster GCC states as they ponder a change in exchange rate regimes," by S&P noted that from a credit ratings perspective, the question is whether or not the ability of the GCC states to service their debt in a timely manner would be affected either by rising inflation or any shift in exchange rate regimes. In our view, the answer is an unequivocal 'no'."
S&P's credit analyst Farouk Soussa said there is much debate at present over whether the GCC states will revalue their currencies or follow Kuwait and change their exchange rate regimes altogether in order to combat the effects of rising inflation and the weak US dollar. The issue is likely to figure prominently when GCC heads of state meet next month.
The report points out that the consequences of the inflationary spiral, which sparked speculation of possible changes in the GCC exchange rate regimes, are offset by revenues from oil and gas exports — the dominant source of the wealth in the region.
In addition, GCC states benefit from the booming non-oil sector and the low level of dependence of public investment on tax revenues.
"Changes in the region's exchange rate regimes would likely further delay the formation of the GCC monetary union. Nevertheless, given that the economic benefits of such a union would be more political in nature, the delay will not have a direct effect on sovereign creditworthiness because the ratings on GCC countries are primarily driven by balance sheet strength, which will be unaffected, and constrained mainly by regional geopolitical risks," it said.
While IMF has said that inflation in the UAE would be dropping to eight per cent this year, some analysts said the soaring inflation is not showing a sign of easing this year. According to UAE Central Bank Governor Sultan bin Nasser Al Suwaidi, inflation in the UAE comes mainly from higher rental rates, is expected to subside as new housing units and office space come to the market in the coming months.
Economists, speaking to Khaleej Times yesterday, said a further cut in dirham rate would stoke inflation. Following a fixed pegged currency system to a falling dollar will only aggravate inflation, they said. With the Federal Reserve cutting US interest rates to contain the fall-out from a mortgage market crisis, Gulf central banks have been forced to follow suit and ignore the risk of stoking inflation which is at decade-highs across the region, they pointed out.
"The decision at a time of high inflation is a detriment to consumers as it further erodes the purchasing power to depositors, whose purchasing power is being eroded by accelerating inflation," Reuters quoted Ashraf Laidi, chief forex analyst at CMC Markets US. Source
The observation by Standard & Poor's Ratings Services came amid growing speculation that the GCC states will revalue their currencies or follow Kuwait and change their exchange rate regimes.
However, the UAE yesterday indicated that it would continue its dollar-peg by cutting interest rates again for the third time in two months in line with a similar move by the US Federal Reserve.
The UAE Central Bank cut the six-month and nine-month certificate of deposit rates by 10 basis points to 4.40 per cent and 4.30 per cent respectively, the 12-month rate by 15 basis points to 4.15 per cent and the 18-month rate by 20 basis points to 4 per cent. It left the one week, one-month and three month rates unchanged.
In its report titled "Balance sheets bolster GCC states as they ponder a change in exchange rate regimes," by S&P noted that from a credit ratings perspective, the question is whether or not the ability of the GCC states to service their debt in a timely manner would be affected either by rising inflation or any shift in exchange rate regimes. In our view, the answer is an unequivocal 'no'."
S&P's credit analyst Farouk Soussa said there is much debate at present over whether the GCC states will revalue their currencies or follow Kuwait and change their exchange rate regimes altogether in order to combat the effects of rising inflation and the weak US dollar. The issue is likely to figure prominently when GCC heads of state meet next month.
The report points out that the consequences of the inflationary spiral, which sparked speculation of possible changes in the GCC exchange rate regimes, are offset by revenues from oil and gas exports — the dominant source of the wealth in the region.
In addition, GCC states benefit from the booming non-oil sector and the low level of dependence of public investment on tax revenues.
"Changes in the region's exchange rate regimes would likely further delay the formation of the GCC monetary union. Nevertheless, given that the economic benefits of such a union would be more political in nature, the delay will not have a direct effect on sovereign creditworthiness because the ratings on GCC countries are primarily driven by balance sheet strength, which will be unaffected, and constrained mainly by regional geopolitical risks," it said.
While IMF has said that inflation in the UAE would be dropping to eight per cent this year, some analysts said the soaring inflation is not showing a sign of easing this year. According to UAE Central Bank Governor Sultan bin Nasser Al Suwaidi, inflation in the UAE comes mainly from higher rental rates, is expected to subside as new housing units and office space come to the market in the coming months.
Economists, speaking to Khaleej Times yesterday, said a further cut in dirham rate would stoke inflation. Following a fixed pegged currency system to a falling dollar will only aggravate inflation, they said. With the Federal Reserve cutting US interest rates to contain the fall-out from a mortgage market crisis, Gulf central banks have been forced to follow suit and ignore the risk of stoking inflation which is at decade-highs across the region, they pointed out.
"The decision at a time of high inflation is a detriment to consumers as it further erodes the purchasing power to depositors, whose purchasing power is being eroded by accelerating inflation," Reuters quoted Ashraf Laidi, chief forex analyst at CMC Markets US. Source
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