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Moody’s: UAE pullout from GCC currency union plan has no direct effect on its ratings

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.

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