Problems with the US economy, the sovereign debt crisis in the Euro zone and the possibility of contagion to significant economies like Italy, Spain and perhaps France and Britain in the coming period, will have several negative repercussions on Gulf economies, economic experts have said.
Economic woes are expected to reduce oil revenues, the key commodity funding Gulf budgets. Other dangers to Gulf economies will result from a decrease in the value of Gulf investments abroad, currently worth approximately US$2 trillion. Gulf investments are primarily in western countries, particularly US markets, where GCC economies own around $800 billion of bonds.
In the long term, a sizable drop in the dollar is expected and this will reflect negatively on the value of Gulf currencies. In addition, it will increase imported inflation in the region. This new economic situation may prompt Gulf countries to reduce investment risks in these economies, including reducing investments and moving away from the US bond market until things become clearer. They may also gradually increase their hard currency reserves against the dollar which currently dominants reserves in line with foreign trade requirements.
Although some are calling for the GCC states to unpeg their currencies from the dollar, this would not be easy as oil is priced in dollars, as are many other major commodities around the world. In addition, 67 per cent of foreign currency reserves are in dollars, and the dollar is used in debt markets and extensively in investments, unlike other major currencies. Further, the US economy is still the largest in the world, constituting 20% of the global economy and carries a lot of political weight around the world, which is an importance factor for keeping the dollar; the dominant commercial currency for the foreseeable future.
Some GCC member states know that it is better not to increase the value of their currencies as they are spending substantial funds on developing their service sectors, particularly tourism which they are heavily reliant on. The Gulf states are trying to attract foreign investment and support for sectors that were affected by the global financial crisis such as real estate. It would therefore be much more useful to keep exchange rates at competitive levels to attract investment to the region. (Source: www.yallafinance.com )