Moody's Investors Service announced today that the recent decision of the UAE not to participate in the Gulf Cooperation Council's (GCC's) proposed monetary union will not directly affect the country's sovereign ratings. Furthermore, any potential postponement or cancellation of the GCC currency union project that may or may not follow the UAE's decision would not directly affect the sovereign ratings of other GCC member states.
In November 2008, Moody's issued a special comment entitled "GCC Currency Union Unlikely To Affect Member States' Government Bond Ratings." In this report, Moody's argued that the formation or otherwise of a GCC currency union would, from an economic standpoint, be effectively ratings neutral. We continue to hold this view. The special comment pointed out that many of the common advantages of a currency union -- including the removal of internal currency risk, the potential boost to intra-union trade, and accompanying institutional and structural improvements -- are muted in the case of the GCC. At the same time, the disadvantages of a currency union -- such as members' loss of independent monetary and exchange rate policies -- are also less applicable given that GCC states already have fixed exchange rate pegs.
"Today's decision by the UAE to withdraw from the proposed GCC currency union, if final, would seem to be a serious blow to the project given that the UAE is the second largest economy in the GCC and that Oman has already stated, in early 2008, that it would not take part in the scheme. Hence, it would not be a surprise if the proposed currency union were stymied by the UAE's decision," said Mr Tristan Cooper, Head Analyst for Middle East Sovereigns at Moody's.
"The move is also a blow to GCC unity more generally and could be interpreted as a sign of how the balance of power between Saudi Arabia and the smaller, richer GCC states has shifted over time. The UAE's decision seems to be linked to the recent news that the GCC's Monetary Council will be located in Riyadh. It remains to be seen what the ramifications of the UAE's action will be for the UAE's bilateral relations with Saudi Arabia, but clearly it is not positive," added Mr Cooper.
"Any adverse political consequences of the UAE's decision, such as a deterioration in intra-GCC relations or a structural worsening of the UAE's relationship with Saudi Arabia would be viewed negatively by Moody's and could potentially weigh on the UAE's sovereign ratings over time. However, such a scenario is unlikely and hypothetical at this stage and we are currently only considering the neutral economic effects of the move," concluded Mr Cooper.
