Despite facing a $250billion squeeze on finances due to the oil price plunge, the GCC countries are not expected to discard their currency pegs to the dollar on the back of their ample foreign currency reserves, according to Moody's Investors Service. "The GCC's large foreign-currency reserves provide ample room to maintain pegged exchange rate regimes for several years, even in an adverse oil price scenario," senior analyst Mathias Angonin said at a Press briefing.
"Changes to the current exchangerate regimes are unlikely because the costs associated with one-off devaluations would outweigh the benefits." In the GCC, with the exception of Kuwait, other five countries have a dollar-pegged exchange regime.
Gulf economies are expected to have a combined fiscal deficit of about $250 billion over the next two years, which is expected to be financed by a drawdown of currency reserves and less than half in borrowing, according to Angonin.
The Saudi Arabian Monetary Agency has repeatedly said it will stick with its currency peg. In a bid to curb speculation, the agency in January ordered banks in the kingdom to stop offering options contracts on riyal forwards to their clients, five people with knowledge of the matter said at the time.
Currency depegging would raise uncertainty about the prices of imported goods in the region, adding to inflationary pressures, according to Moody's. Fiscal and trade gains brought with depegging would be limited, the ratings firm said.
Angonin noted that lower oil prices would slow growth and increase budget deficits in oil-exporting GCC countries in 2016. "GCC governments have started to cut costs and introduce new revenue-enhancing measures. Lower public spending is likely to weigh on economic growth in 2016, although we expect it to remain positive as oil production is sustained and expenditure cuts are implemented only gradually," said Angonin.
"However, lower oil prices will also affect GCC public finances, eroding their fiscal reserve buffers and increasing debt levels."
Moody's projects that the GCC's fiscal deficit will reach close to 12.5 per cent of regional GDP in 2016, up from nine per cent in 2015. The ratings agency expects the fiscal deterioration to be faster in Saudi Arabia, Bahrain and Oman than in the UAE, Qatar and Kuwait, where reserves cushion the short-term negative impact and allow a more gradual adjustment.
As governments tap all possible sources to trim the deficit, the sovereign borrowing of GCC countries is expected to reach $250 billion in 2016/17. "We expect at least 50 per cent of the deficit to be financed through drawdowns and reserves and the other half through debt issuances," Angonin said.
Funding of these deficits will lead to a rise in government debt and a decline in government financial assets, said Moody's. The deficit funding mix will change going forward, with governments increasing their recourse to external debt.
The biggest increases will be in Bahrain and Oman, where it projects government debt-to-GDP to rise by 35 and 18 percentage points in 2016 from their 2014 levels, followed by Saudi Arabia, which will see its government debt ratio rise by at least 15 percentage points.
Moody's estimates that fuel price savings and value-added tax will average 2.5 per cent of GDP across GCC countries, which falls short of addressing fiscal challenges.
Moody's oil price assumptions were revised downwards at the beginning of 2016, to $33 per barrel on average in 2016 and $38 in 2017 amid higher-than-expected supply from the US and, going forward, Iran and Iraq.
Source: Khaleej Times