Kuwait lets markets guess over peg with dinar fall

Some bankers said Kuwait may continue to allow the dinar to depreciate in weeks ahead to support the government's efforts to prop up the economy against a global slowdown. The weaker the dinar is, the more revenue the state gets.

Others have suggested that Kuwait could be heading for a return to the dollar peg it abandoned in mid-2007 in favour of a basket of currencies, although they say this is not a move that is imminent. Rather it could form a prelude to a Gulf currency union in the medium-term.

"I don't think they will return to the dollar peg but leave the dinar unofficially at these levels because it suits them now," said a banker at a local lender, echoing views of others.

The world's seventh-largest oil exporter broke ranks with fellow Gulf Arab states in 2007 and dropped the peg to help fight then-soaring inflation as it pays for a third of its imports in euros.

On Thursday, the central bank let the dinar reference rate fall 0.02 per cent below dollar levels since the depegging after its currency was up more than 4 percent at the start of the year and 8 per cent for a good part of 2008. Economists said the central bank, which was not immediately available for comment, was mainly catching up on the dollar having risen around 7 per cent against the euro this year, while also trying to boost oil revenues paid in dollars.

Faced with demands for more spending to prop up growth, the budget is also under pressure as its main source of income, crude, falls. Kuwait crude traded at $38.40 per barrel on Wednesday down from $135 in July, state news agency KUNA said.

Finance Minister Mustapha al-Shamali said earlier this month Kuwait would lower spending except for salaries and investments but is under pressure from lawmakers to aid citizens hit by a 38 per cent fall in local stocks last year.

"I think the currency basket is serving Kuwait well, and I see no policy argument in favour of a return to the dollar peg," said Simon Williams, regional economist at HSBC in Dubai.

UNION?

But some argued that Kuwait may at some point return to a dollar peg to prepare for a long-planned Gulf monetary union and since inflationary pressures have being easing.

"Although we do not explictly speculate over a short-term change in Kuwait's forex regime, we will not be surprised if the Kuwaiti government decides to repeg the dinar to the dollar to unclog money markets," Bahrain's Gulf Finance House said.

"In our opinion, the basket peg adopted in May 2007 has neither helped Kuwait contain inflationary pressures ... nor has it helped Kuwait unfreeze money market in the second half of 2008," it said in a recent research note.

"Repegging will probably take place in preparation for Gulf monetary union but there are few in the market who expect union to take place on schedule at the start of 2010," Williams said.

The central bank, which has not dislosed the currency basket and only says the dollar plays a key role, usually adjusts the dinar at 8am (0500 GMT), with the next move likely on Sunday.

"There is consensus out there that it could be pegged on these levels but obviously it is a wait and see attitude until we see what happens on Sunday," said a local broker.

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