11 Apr 2016

CURRENCY DE-PEGGING: POSSIBLE CONTRACTUAL PROVISIONS IN THE ENERGY SECTOR

Authored by: Michael Webb

CURRENCY DE-PEGGING: POSSIBLE CONTRACTUAL PROVISIONS IN THE ENERGY SECTOR

In brief:

The dramatic fall in crude prices has led to speculation that some oil-producing countries may be forced to abandon their currencies’ fixed exchange rate pegs, which are typically set to the US Dollar. This arises as the fall in oil revenues results in a ballooning budget deficit in a country which is heavily dependent on oil production, causing that country to deplete its foreign reserves. This, in turn, leads to pressure on the oil-producing country to devalue its own currency.

The UAE is not thought to be one of the countries under greatest pressure to abandon its UAE Dirham / Dollar peg, for a number of reasons, including:

•    The Dirham / Dollar peg has remained in place during previous periods of low oil prices.

•    The UAE has enjoyed considerable success in diversifying its economy away from reliance on oil revenues, and is therefore less susceptible to a dramatic fall in the oil price.

•    The UAE has greater fiscal strength than many other oil-producing countries, and considerable foreign reserves.

Nevertheless, it is worth considering what provisions might typically apply to the parties to a contract if the Dirham / Dollar peg were to be abandoned, revised or replaced.

The full article is due to be published in the April Edition of Emirates Law Business & Practice, however if you would like to discuss the topic with Michael in the interim, please do make contact.

 
 
This article, including any advice, commentary or recommendation herein, is provided on a complimentary basis without consideration of any specific objectives, circumstances or facts. It reflects the views of the writer which may, in some cases, differ from those of the firm, especially in the developing jurisdiction of the UAE.