Bahrain economy benefitted from dollar peg : study

Manama: Bahrain economy and its stock market benefitted from the dollar peg; the Kingdom benefitted due to its relatively flexible peg compared to the rigid exchange rate mechanism followed by Oman and the Kuwait policy of following a basket of currencies. This conclusion was reached by a recent study published in International Journal of Economics and Financial Issues.

UAE, Qatar and Saudi Arabia follow similar US$ peg like Bahrain and also benefitted from monetary policy changes.

The study also urges the GCC countries to open their stock markets for international participation and harmonize their economic and financial strategies toward financial integration, to increase the chance of achieving successful economic unification aimed by the establishment of the GCC.

The research revealed that the influence of monetary actions on each country’s stock market diverged significantly. There is significant difference in the type and nature of internal factors characterizing each of them.

 According the researchers, the GCC region was chosen for research for many reasons. First of all, the region shares similar socioeconomic and cultural characteristics, Secondly, during the past decade the GCC region has experienced an unprecedented economic performance thanks to the windfall of oil revenues. The growth was on par with other emerging markets, with average growth rates exceeding 5-6 pc, and much faster than advanced economies. Thirdly, from a monetary policy point of view, the GCC countries are still among the few countries relying on the fixed exchange rate regime, notably the peg to the US$. The choice of this monetary policy has increased confidence and external stability,” notes the report.

“The time-varying contemporaneous correlations present the differences among GCC countries. For Bahrain, the contemporaneous correlation is negative most of the time. For Kuwait, Oman, Qatar and Saudi Arabia there are periods of negative and positive correlations. These empirical results have important policy implications. They indicate that the dollar peg has served the overall GCC economies well in sustaining macroeconomic stability especially for countries with relatively flexible peg,” the study says.