Pressure is mounting on the Gulf central banks to depeg their currencies in order to contain rising inflationary stress, according to a study released on Wednesday.
Kuwait-based Global Investment House said “the weakness in the US dollar will potentially aggravate GCC inflation by pushing up cost of importing goods to the region as it is heavily reliant on imports.
“Gulf will not only be exposed to its currency dropping against other currencies it will also be exposed to cost push inflation as well. The downgrade will undoubtedly increase pressure to de-peg the GCC currencies so as to contain inflationary pressures in the region however it a difficult decision to be made and one which involves other important factors that need consideration,” said Faisal Hasan, Head of Research at Global.
Despite the downgrade and its obvious effect on the dollar and its potential risk to Gulf currencies, UAE and Bahrain have already announced that they will maintain the dollar peg.
Hasan predicted that WTI crude oil price will range between $70 to $75 per barrel this year which is in the comfortable zone for the oil-producing Gulf state to maintain fiscal spending.
“We cannot rule out the possibility of a recession in the US and further economic turmoil in European Union, which will have impact on the crude oil prices. However, we are not anticipating the average prices of benchmark oil to touch levels seen in 2008. We see the average prices of WTI crude oil to remain in the range of $70/bbl to $75/bbl in 2011. The average prices of other benchmark crude oil in 2011 i.e. UK Brent and Opec may drop a further 20-25 per cent below our current expectations in case the US enters recession. While the average prices of WTI, UK Brent and Opec could be lower by 10-15 per cent against our current expected price range for 2012. Despite this, as long as oil prices remain above $70/bbl, GCC countries are likely to remain in comfortable position and would be able to maintain their fiscal spending,” he added.