Qatar hints at Gulf currency shifts to come

DUBAI: A statement on foreign exchange policy by Qatar's central bank governor has struck a nerve in financial markets across the Gulf, reminding investors that decades of currency stability will not last forever.
Five of the six oil exporters in the Gulf Cooperation Council (GCC) — Saudi Arabia, the United Arab Emirates, Qatar, Oman and Bahrain — fix their currencies against the US dollar under arrangements dating back as far as the 1970s.
But late last month, Qatar central bank chief Sheikh Abdullah bin Saud Al-Thani suggested economic trends might eventually push Qatar into allowing its currency to fluctuate.
In comments to Reuters, he said the country might one day need a more flexible currency, though it was not at present considering any change to the riyal's peg.
"With increasing integration in international trade, services, and asset markets, a higher degree of exchange rate flexibility may become more desirable to ensure external stability and international competitiveness of our exports," Sheikh Abdullah said.
It was believed to be the first time in years that a top Gulf policy maker had publicly hinted at the possibility of a country removing its peg and letting its exchange rate fluctuate more freely in response to market forces.
In reaction, prices of 12-month foreign exchange forward contracts for Qatar's riyal, Saudi Arabia's riyal and the United Arab Emirates dirham — agreements to trade them versus the dollar a year from now — all fell slightly.
Investors were assuming that since those countries ran big trade surpluses, any greater exchange rate freedom would, initially at least, cause their currencies to appreciate against the dollar, traders said.
So far, Gulf policy makers outside Qatar have not echoed Sheikh Abdullah, and GCC countries will not abandon their currency pegs lightly. The arrangements have mostly worked well for them over the decades, providing a source of predictability in one of the world's most volatile regions.
The pegs have helped to prevent any runs on Gulf currencies during crises such as the Iraq wars and tensions over Iran's disputed nuclear program. Also, Gulf economies depend heavily on oil exports and oil is internationally traded in dollars, making export earnings more reliable.
The currency pegs limit balance sheet risks since much of the Gulf's external assets are held in dollars, while Gulf monetary policies remain predictable, widely understood and easy to administer, said Farouk Soussa, Citigroupís chief economist for the region.
"So long as oil remains priced in US dollars and the region's exports are dominated by oil, then there will be strong reasons for sticking to the current pegs," said Simon Evenett, professor of economics at the University of St. Gallen in Switzerland.
But the pegs also have major disadvantages. Gulf countries have little room to conduct their own interest rate policy; to avoid excessive flows of money into and out of the dollar, they mostly need to keep their interest rates close to US levels, even if the condition of their economies is very different.