Kuwait’s decision on peg may hit monetary union



In a Press statement, S&P noted that before May 20, 2007, the day Kuwaiti authorities announced the decision, the GCC states of Saudi Arabia, Bahrain, Oman, Kuwait, Qatar and the UAE had their currencies pegged to the US dollar. It said that it was also assumed that the GCC would likewise peg its common currency to the US dollar by 2010.



"While the decision by Kuwaiti authorities on May 20, 2007 to abandon the dinar peg to the US dollar has no impact on the sovereign ratings on the State of Kuwait and will help to subdue inflation, it casts significant doubt over plans to establish a monetary union across the Gulf States by 2010," S&P said.



Luc Marchand, credit analyst at S&P, said the common peg supported GCC’s goal for a common currency. "By virtue of pursuing policies that are beneficial to the national interest but that are potentially detrimental to the common goal, Kuwait’s decision to switch back to pegging the dinar against a basket of currencies raises questions regarding the commitment of individual states to a monetary union, despite repeated official assurances to that effect," he said.



He said that while Kuwait’s decision does not derail the common currency project, it will in practice complicate the matter. "The peg for any common currency that involves Kuwait is now less likely to be the US dollar, as it is unlikely that Kuwait will revert to such an arrangement in future," the statement said. It stressed that this "raises the spectre" for the GCC countries, five of which are opposed to abandoning the dollar, of going to the negotiation table to agree to a common peg.



S&P said the importance of a monetary union from an economic perspective has always been limited, although it is a major step towards greater regional economic and political integration. It added that regional integration in terms of fiscal and customs practices and financial markets has been staying away from questions pertaining to monetary union. "In short, the potential benefits from a future monetary union are not a support to the ratings of GCC countries, and thus any threat to its eventual inception will not impact upon the sovereign ratings," Marchand said.



A decision to peg the dinar again to a basket of currencies would sit well with S&P’s expectation, as it will have a positive impact on inflation. It would stop the slide of the dinar against the currencies of some of Kuwait’s trading partners.

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