Oman central bank committed to dollar peg

03/02/2016 05:32 AST

Oman remains committed to the peg of its rial currency against the US dollar, the head of the central bank said, after the rial dropped to its lowest level in the forward market for a decade. Low oil prices are hurting Oman’s state finances and depleting its foreign reserves, fueling speculation among some foreign bankers that it may eventually have to abandon the peg of 0.3849 rial to the dollar, set in 1986.

One-year dollar/rial forward — deals that will be settled in 12 months’ time — jumped on Monday as high as 1,500 points, their highest since 2006. That implied the rial would depreciate about 4 percent from its peg.

Forwards came down slightly to 1,400 points by Tuesday afternoon, but currency dealers said the market’s move this week showed some bankers were identifying the Omani rial as the most vulnerable currency in the Gulf oil exporters.

“The currency pegs in Oman and Bahrain are not robust to severe terms-of-trade shocks, and sustainability issues may become increasingly more pressing over the next 12-24 months if oil prices stay at below $60-$70 per barrel,” Goldman Sachs said in a research note in late January.

A dealer with a foreign bank in the Gulf said: “Oman is the weakest link in the GCC and its peg may come under pressure as early as end-2016.” The government posted an $11.7 billion deficit last year and has forecast another big deficit this year despite spending cuts.

The plunge of the Brent oil price to near $30 a barrel, from around $100 18 months ago, has created some unease about all the GCC currencies.

But the UAE, Qatar and Kuwait have hundreds of billions of dollars of overseas assets and small populations, so the markets think they are safe for now. Central Bank Executive President Hamood Sangour Al-Zadjali said that Oman has no intention of altering its currency peg.

“Nothing changed. We are committed to the peg with the US dollar. The interest rate hasn’t changed,” he said, adding that the rial’s weakness in the forward market might be partly due to the strength of the US dollar globally.

Nevertheless, speculation against the rial may continue unless there is a substantial rebound of oil prices. The Goldman Sachs report estimated the probability of a devaluation in Oman could reach over 80 percent within three years.

Arab News