This month’s advisory board poll focused on the Middle East, in particular the impact of rising US interest rates on the exchange rate peg for a group of oil exporters. Members of the OMFIF advisory network were asked: ‘With the Fed on a tightening path and with oil under pressure, is it time for Gulf Co-operation Council economies to question the appropriateness of their dollar peg?’; ‘What is the main obstacle to a change of exchange rate regimes?’; ‘Will the oil price increase or decrease in 2017?’; and ‘Will the Iran deal survive Trump’s presidency?’
Of respondents, 62% believe GCC countries should not question their dollar pegs, reasoning they have acceptable rates of inflation while the natural link to the dollar through the price of oil remains advantageous. The 38% of respondents who disagreed believe a flexible exchange rate allows for the currency to absorb market shocks and removes the significant costs of maintaining a fixed rate.
In the event of an exchange rate regime change, respondents said that the main obstacles would come from: politics; foreign currency liabilities of the private sector; loss of confidence of foreign investors; a lack of economic diversification and integration of the GCC; conservatism; and the fear of antagonising the US.
Oil prices will increase in 2017, according to 46% of respondents; 23% expect prices to remain steady through the year; 15% believe prices will fall; with the remainder uncertain. On Iran’s nuclear deal, 62% of advisory board members believe that it will remain uninterrupted by a Trump presidency, stating that despite much of the insular rhetoric coming from Washington, Iran will not renege the agreement.
'The GCC requires exchange rate flexibility that allows currencies to act as shock absorbers during times of high market volatility. These economies see the peg as a symbol against price volatility (as oil is priced in dollars). This could backlash as predicting the oil price is always hazardous, even more so with the Trump administration.'
Brigitte Granville, Queen Mary College, University of London
'GCC economies breaking the peg would not trigger a current account rebalancing, as domestic producers lack capability to fill importers’ market share. The government would enjoy only limited fiscal relief given the high import share of government expenditure. So the greatest benefits of breaking the peg would not be accrued by GCC states, which enjoy the stability, predictability and low transaction costs afforded by it.'
Eliot Hentov, State Street Global Advisors
'For GCC economies the peg is an optimal regime – it is understood by their economic agents. It should be accompanied with the build-up of reserve funds capable of serving as macroeconomic stabilisers. There is a lack of alternatives. The credible peg is based on the notion that exit must be abrupt and unexpected and often involve debt payment freeze or default. Questioning the peg without knowing where the discussion leads just destabilises the economy.'
Miroslav Singer, Generali CEE Holding
'It has long been unwise for the GCC countries to peg to the dollar. They would be better off treating their currencies more as the commodity currencies they are, to absorb some of the real and price distortions introduced by movements in the price of energy.'
Ted Truman, Peterson Institute for International Economics