GCC creditworthiness unaffected by inflation, exchange regime changes, says report

"From a credit ratings perspective, the question is whether or not the ability of the GCC states to service their debt in a timely manner will be affected either by rising inflation or any shift in exchange rate regimes,"

said Standard and Poor's credit analyst Farouk Soussa.

"In our view, the answer is an unequivocal 'no'."

There is much debate at present over whether the GCC states will revalue their currencies or follow Kuwait and change their exchange rate regimes altogether in order to combat the effects of rising inflation and the weak U.S. dollar. The issue is likely to figure prominently when GCC heads of state meet next month.

But as the report points out, the consequences of the inflationary spiral, which sparked speculation of possible changes in the GCC exchange rate regimes, are offset by revenues from oil and gas exports--the dominant source of the wealth in the region. In addition, GCC states benefit from the booming nonoil sector and the low level of dependence of public investment on tax revenues.

Changes in the region's exchange rate regimes would likely further delay the formation of the GCC monetary union. Nevertheless, given that the economic benefits of such a union would be more political in nature, the delay will not have a direct effect on sovereign creditworthiness because the ratings on GCC countries are primarily driven by balance sheet strength, which will be unaffected, and constrained mainly by regional geopolitical risks.