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Oman: The Gulf Tries To Stave Off Currency Speculation

3 MINS READJan 10, 2017 | 18:58 GMT

Oman is in the midst of negotiations with the other members of the Gulf Cooperation Council to secure a multibillion-dollar deposit into the country's central bank. In recent weeks, media leaks indicate that finance officials from Kuwait, Qatar and Saudi Arabia have all spoken with Omani officials. Oman hopes that the deposit will stave off currency speculation on the rial and lower the risk of devaluation. (Since 1986, Oman's currency has been pegged to the dollar.)

Saudi Arabia and the United Arab Emirates are deeply concerned about any signs of financial instability in Oman. They fear that any weakness could spread through the rest of the Gulf Cooperation Council, even resulting in dangerous speculation on their own currencies. If the planned central bank deposit does not ease pressure, the other Gulf states might next enter currency swap agreements to hedge against the risk even further. There is a precedent: In 1998, Riyadh was forced to enter a swap arrangement with the United Arab Emirates. Oman could draw from its sovereign wealth funds, which have an estimated $40 billion, to defend its currency, but would prefer not to withdraw from those funds as they continue to bring in revenue.

Oman is similar to Saudi Arabia in that it is a relatively high producer of oil per capita, but not on the level of Gulf states such as Kuwait and the United Arab Emirates. Oman's small size and lower oil production has meant that its sovereign wealth funds and foreign reserves are much lower than the rest of the Gulf oil producers on an absolute basis even though on a per-capita basis they are similar. This makes it far easier for speculators and currency traders to try to break the Omani currency peg given the lower absolute size of its reserves.

The leaks follow reports in December that Oman had asked to join the Saudi-led coalition fighting in Yemen, citing unnamed Saudi and Gulf sources. The Saudi Press Agency confirmed the report and explicitly mentioned a letter from Oman's Defense Ministry. Such a move could mark a shift from Oman's typically neutral position between rival Iran and Saudi Arabia. A lack of benefits from Omani relations with Iran were quoted as a reason for the change, according to Reuters sources, and a Gulf investment into Oman's central bank would certainly help in convincing Oman to hew closer to the Gulf stance of opposing Iran. 

But it is unclear how much Oman intends to support the Gulf. After all, joining the Saudi-led alliance has been largely symbolic for its other members. Pakistan provides an example. While Islamabad did join the Saudi-led coalition in Yemen, it still maintains its trading relationships with Iran, without having to commit military power to operations. Oman's shift might be similar.

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