Gulf states will not abandon dollar peg in medium term

Subject

Gulf currency pegs.

Significance

The collapse in oil prices has led to some speculation that fiscal pressure may lead some Gulf Cooperation Council (GCC) countries to abandon their longstanding currency pegs to the dollar. Some oil exporters in other regions have abandoned their own pegs over the last year. One signal of market concern is the discounts now being applied to Gulf currency forwards, indicating a risk of devaluation, albeit relatively low.

Impacts

• Foreign investors in the Gulf can remain confident of exchange rates.
• The transition to the long-planned Gulf monetary union will be delayed further until the 2020s.
• Real-effective exchange rates will remain overvalued, indicating poor international competitiveness.