Qatar has sufficient resources to support dollar peg: EIU
September 21 2017 09:23 PM
Cars drive past the Qatar Central Bank building in Doha. Qatar has sufficient resources to support its dollar peg, according to the EIU.

With around $180bn of the Qatar Investment Authority's reserves held in liquid form, Qatar has sufficient resources to support its dollar peg, the Economist Intelligence Unit (EIU) has said in a report. 
However, it is dependent on the ongoing economic blockade on Qatar by Egypt, Saudi Arabia, the UAE and Bahrain, EIU said. 
All Gulf Cooperation Council countries peg their currencies to the US dollar, with the exception of Kuwait, which pegs its currency to a basket of currencies of which the US dollar is most dominant. Therefore, when the US Federal Reserve raised its policy rate in June (by 25 basis points to 1.25%), most of the GCC countries followed suit, said EIU in a recent report. 
The central banks of Qatar, Saudi Arabia, the UAE and Bahrain all raised their policy rates, mirroring the US rate rise. The Central Bank of Oman implemented a policy of incremental increases to its policy rate, while the only central bank that did not raise its rate was that of Kuwait. 
“The economic fundamentals of the GCC economies, however, are far weaker than those of the US and therefore the peg to the dollar has made currencies of the region grossly overvalued (particularly the currencies of Oman and Bahrain). Overvalued exchange rates mean that imports are cheaper than domestic products and so these economies have experienced a growing dependence on imports,” EIU said. 
Furthermore, since the incentive for domestic industrialisation has been low, the ability to generate employment (outside of the oil and gas industries) in these economies has also weakened, it said.
The GCC economies account for a third of the world's oil reserves and therefore depend heavily on the sale of oil for their income. Since oil prices slumped in mid?2014, the countries have been running “massive” budget deficits. 
The EIU said there was speculation about the GCC countries abandoning their currency pegs as crude prices dipped to $30 for barrel in the first quarter of 2016, severely undermining the financial position of these countries.
“However, strict austerity measures enforced by the governments, which included subsidy and spending cuts, eased pressures on the economies, and we expect the fiscal deficits of all the GCC countries to narrow in 2017. Nonetheless, persistently low oil prices will continue to constrain economic growth,” EIU noted.
Foreign reserves accumulated by the GCC countries have long provided a cushion to withstand pressures on their economies and their currency pegs, it said.
However, since mid-2014, these reserves have been declining and the countries have resorted to borrowing to finance their fiscal deficits. Even though the massive stock of foreign reserves that Saudi Arabia had has been eroded, it is still very substantial; equivalent to 72% of the EIU’s forecast GDP for 2017. 
“The US is on an upward growth trajectory and therefore it seems likely that the monetary tightening by the Fed will continue. This would mean that, in order to maintain their pegs, the GCC countries will follow suit. Diversification has become a crucial part of the governments' agendas across the region. 
“Since the diversification response to the challenges posed by low oil prices has been inadequate thus far, it is likely that unemployment among the GCC nationals will rise. However, increased diversification efforts will, in theory, increase employment among the young and that is an important aspect to consider as unemployment has been a serious problem across the region. Moreover, the population is bound to rise in the coming years and so the government will need to cater for the rising demand for jobs.
“It is unlikely that the GCC countries will abandon their currency pegs as they have provided stability for decades in the region. On the one hand, mirroring the US rate hikes is currently counter-cyclical for the GCC countries as the demands of their economies point towards monetary loosening at a time when they are facing low economic growth on the back of fiscal tightening,” EIU said.

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