Could Donald Trump be good for the Gulf?

Muscat: Donald Trump’s surprising elevation to US president won’t see Oman abandoning its dollar peg, say economists and analysts, with some debating that his election might even be good for the Gulf.
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“The Omani rial’s peg to the US dollar is one of the pillars of economic and financial stability in the Sultanate. So, I don’t expect any change (in the policy) any time,” said Fabio Scacciavillani, chief economist, Oman Investment Fund.
He was talking to Times of Oman, in the aftermath of Donald Trump’s surprise election victory last week.
Echoing a similar view, Loai B. Bataineh, general manager and head of investment banking group at the Oman Arab Bank, said: “Oman will benefit from a strong dollar if Trump manages to attract the US companies to invest within the country.”
This is important since oil is priced in dollar terms and the Oman government depends on more than 60 per cent of its revenue from crude oil resources.
Hamoud Sangour Al Zadjali, executive president of the Central Bank of Oman, last February said that the Sultanate remains committed to the peg of its rial currency against the US dollar. He was unavailable for comment on the Sultanate’s foreign exchange policy on Sunday.
Although the US dollar depreciated immediately after the election result was announced, it recovered on the same day. Since the Omani rial is pegged to the US dollar, any appreciation in dollar value is directly reflected on the local currency.
Elaborating on the implications of the victory of Donald Trump in the recent US election, Scacciavillani said that it will exert its influence through three transmission mechanisms.
The first one is political – how the new US administration will tackle the crisis in war-torn Middle East countries like Syria, Yemen and Libya and its attitude towards the nuclear deal with Iran.
The second one focuses on oil price. “So far, it is not clear whether there will be an immediate effect in oil price with the change in US government,” added Scacciavillani.
Saying that the oil price may take different directions, depending on the policies of the government, he noted that a sceptical attitude towards global warming would favour hydrocarbon consumption and therefore will be positive for the oil price. On the other hand, cutting red-tape for energy companies in the US will lead to higher production and therefore be negative for oil prices.
The third transmission mechanism will hinge on interest rate because investors are expecting an economic policy that is more aggressive and expansionist with higher spending on infrastructure projects and defence, along with a lower income tax. “This means that there will be higher rates (yields) on government bonds and a global reflation, which will sweep all markets, including Oman.”
Rebound in oil prices
“If these stimulus measures will succeed, there will be a gradual rebound in oil prices together in conjunction with tighter monetary conditions. However, if it fails, the risk is to trigger a debt crisis and a recession in two to three years,” added the economist.
Trump this year promised independence from Opec and vowed to dismantle a nuclear deal with Iran that unlocked the nation’s crude exports.
The US president-elect added that he would approve a pipeline from Canada to the US, which would curb demand for oil from the six-nation Gulf Cooperation Council, most of whose governments rely on energy revenue to fund spending.
Bataineh said that the new US administration under Trump’s leadership would discourage large companies to invest outside and will reduce income tax, which will have major impact in creating jobs.
The US dollar, Bataineh said, will continue to fluctuate until Trump assumes charge. The future trend in dollar value against other major currencies will depend on how Trump manages his country’s trade deficit with China and his foreign policy. “We will continue to see a strong dollar,” noted Bataineh.
S. Suresh Kumar, head of research at Al Maha Financial Services, last week said that the future trend in dollar value will eventually depend on US Federal Reserve policy on interest rate, which is expected by the middle of December. All indications are pointing to an increase in Federal Reserve rates, which will help dollar to recover.