GCC Ministries of Finance and Economy Meeting to Kick Off Saturday

Article Date: 18:59 2010/05/05
Article ID: 0054
Riyadh, May 05 (QNA) - Finance and Economics ministers of the Gulf Cooperation Council (GCC) are meeting at the GCC Secretariat in Riyadh, Saudi Arabia on Saturday. GCC Secretary General Abdurrahman bin Hamad Al-Attiyah highlighted the particular importance of this meeting, which will precede the 12th consultative meeting of GCC leaders, due to be held in Riyadh on Monday. He explained that the meeting will focus on the recommendations and outcomes of the joint meeting of the GCC Customs General Managers and the customs union''s committee, pursuant to the resolution adopted by the 30th session of the GCC Supreme Council hosted by Kuwait on December 14-15 2009. It will further discuss the economic aspects of Qatar''s Vision to activate the GCC council, including the establishment of a joint bank for development and joint investment in all sectors, particularly in education and health, H.E. Al-Attiyah said. The meeting will also consider the economic side of the Bahrain Vision to develop the GCC council and its proposal to establish a special fund for financial and economic stability, he added. On the same context, H.E. Al-Attiyah pointed out that the meeting will study means of implementing the Supreme Council''s decisions in response to the financial crisis and its impact on GCC countries. Concluding, the GCC Chief said, the meeting will as well focus on GCC the committees of joint economic action, including the GCC common market, the Committee of Governors of GCC Monetary Institutions and Central Banks and the GCC joint railway network. (QNA) f l/OM

Arabic (& Asian) Currency Union Plans

http://www.ecb.int/paym/groups/pdf/FXCG_arab_asien_currency_unions_080909.pdf?42ab8d64afcc73031bb2df65c3e28c2d

Philipp Nimmermann
BHF-BANK Financial Markets

NBK report says gcc monetary union faces two main challenges / 1

NBK report says gcc monetary union faces two main challenges

Article Date: 13:56 2008/09/28

Article ID: 0028

Kuwait, September 28 (qna) -The National Bank of Kuwait (NBK) said Sunday that two main challenges faced the GCC Monetary Union, the first being that economic diversification in the coming years will begin altering GCC countries'' underlying economic similarities. In a report issued here today, NBK said that while this increased economic diversity should help foster intra-regional trade, it could also subject the region to asymmetric economic shocks and generate the need for different monetary and fiscal policy responses among member states.

As for the second challenge, NBK said that the rise and divergence in inflation rates among the GCC nations in recent years will, at a minimum, complicate and probably delay the implementation of a monetary union. Averaging just 0.4 percent from 1997-2002, GCC inflation has risen sharply to a rate of 6.9 percent in 2007, with its rate of increase more than doubling between 2005 and 2007. After hitting a recent low of 3.0 percent in 2003, the difference between the highest and lowest inflation rate in the GCC had quickly widened to 10.4 percent in 2007.

The report noted that excluding Qatar, income inequality (as measured by per capita GDP) within the GCC is relatively modest. Significant gaps in per capita incomes need not necessarily be a problem for a well functioning monetary union. When the Euro was first introduced in 1999 (as a virtual currency), for example, both Greece and Portugal, had per capita incomes one quarter that of Luxembourg''s. The degree of economic convergence to achieve monetary union within the GCC is already quite advanced. It has already achieved considerably more economic integration than the Eurozone currently possesses after more than half a century of working toward integration.

However, given their vast differences in fossil fuel endowments, the economic structures between GCC member states will increasingly become less homogeneous in the coming years. Even states well endowed with energy reserves are likely to achieve differences in the pace and scope of their economic diversification. For example, given their relatively small reserves, the need for diversifying away from hydrocarbons is clearly most paramount for Bahrain and Oman. In terms of monetary convergence, the NBK report said that the economic obstacle in both forming and maintaining a well functioning monetary union is cyclical in nature. The economic boom that started in 2003 coinciding with the rise in oil prices has dramatically increased the rate of inflation throughout the region. The inflation criterion for monetary union stipulates that the inflation rate for each member should not exceed by more than 2.0 percent the GCC weighted average rate. As for fiscal convergence, GCC government revenues, expenditures and budget balances all exhibit a high degree of co-movement due to their high degree of dependency on energy revenues. Hydrocarbon revenues as a share of central government revenues for the GCC countries in 2007 ranged from a low of 76 percent for Bahrain, Qatar and the UAE to a high of 94 percent for Kuwait.

Gulf currency union could measure core inflation

Gulf currency union could measure core inflation
by Daliah Merzaban on Monday, 08 September 2008

CURRENCY BASKETS: Only Kuwait has so far ditched the dollar peg ahead of monetary union. (Getty Images)Gulf Arab oil producers are discussing modifying the inflation criterion of their monetary union plan to measure core inflation, which strips out the impact of soaring rents, a Qatari official said on Sunday.

Five Gulf states, including Qatar and Saudi Arabia, are preparing for monetary union - including a single currency - by a 2010 deadline that many policymakers have said would be very difficult to meet.

An inflation target of no more than 2 percent above the regional average has been the most contentious of the European Union-style convergence criteria agreed by Gulf states.

Consumer price inflation (CPI) ranges from 3.1 percent in Bahrain to almost 15 percent in Qatar.

Under a proposal discussed by a regional technical committee on Sunday, the inflation target would measure core inflation, which strips out the housing and rental costs that have driven inflation in some states.

"Consumer price inflation is not a good measure for the purposes of monetary policy because it contains volatile components that we want to get rid of," said the Qatari official involved in the talks.

"We are proposing looking at the underlying long-term inflation, the components of CPI that create persistent inflationary pressures," the official said, declining to be identified.

The benefits of measuring core inflation would be discussed on Sunday by officials of the six Gulf Cooperation Council (GCC) states, according to an opening speech prepared by the Qatari central bank.

Prices have been soaring in the Gulf as governments invest windfall oil revenues into economic diversification, which has created a mismatch between supply and demand for housing, especially in Qatar and the United Arab Emirates.

The Qatari central bank completed a study that showed housing prices were the most-volatile component of inflation in the country, the official said. "CPI has been creating more divergence, and we want convergence."

Gulf Arab states should consider dropping their pegs to the US dollar to have more tools to control inflation and achieve single currency criteria, Dubai International Financial Centre (DIFC) economists said in August.

In 2007, the weighted average Gulf inflation rate was 6.9 percent, a level exceeded by the UAE and Qatar, the DIFC said.

States in the world's biggest oil-exporting region are giving a renewed push to completing monetary union after the project was thrown into question when Oman decided in 2006 it would not join and Kuwait dropped its dinar's dollar peg in 2007.

In June, Gulf central bank governors finalised a draft monetary union deal and agreed on the rules for setting up a monetary council that will form the nucleus of a regional central bank.

Gulf central bank governors and finance ministers will meet next week in Jeddah, and are likely to finalise both agreements, which would then be taken to Gulf Arab rulers at a meeting in November or December.

Several policymakers, including the Saudi and UAE central bank governors, said this summer meeting the 2010 deadline would be challenging. (Reuters)

nice article: Time for change: Revaluation will not stop future inflation

06 September 2008
Straight talk from Chief Economist at al khalijial khalijiAl Khaliji Commercial Bank
Al Khaliji

Businesses will gain from a de-pegging of the Qatari Riyal, according to the first ever business optimism survey of Qatar by Dun & Bradstreet, sponsored jointly by al khalijial khalijiAl Khaliji Commercial Bank
and the Qatar Financial CenterQatar Financial CenterQatar Financial Centre

According to the survey of 340 businesses spread across a range of sectors in Qatar, 46% overall will benefit from a de-pegging of the Qatari Riyal. The underlying reason is simple. Businesses that import raw material, machinery and labor from non-dollar countries like Europe, Japan, India and China, have to pay more in Riyals as it depreciates in line with the dollar because of the fixed exchange rates.

The Riyal peg is a key driver of inflation in the region Broadly speaking, inflation in the region has four sources:
A global liquidity driven boom has pushed commodity, agriculture and construction materials prices sky high. The IMF's commodity price index has risen by a cumulative 10 percent in 2008 after having increased by about 30 percent between December 2006 and December 2007.


The weak dollar has been one of the key reasons for rising global commodity and energy prices. Suppliers raised prices of their products (for things like steel, food, energy) as a weakening dollar eroded their profits. In addition, commodities that also serve as assets (e.g., gold and other precious metals, oil) saw their prices rise because a weaker dollar made them more attractive for financial investors and speculators.


A falling US dollar combined with the dollar-based pegs have transmitted the global price increases to the GCCGCCCooperation Council for the Arab States of the Gulf, in a phenomenon called "imported inflation". The falling dollar has caused the QAR to depreciate by as much as 20-30% in the past few years. The combined contribution of this, with the commodity price inflation above, may have added as much as 60-70 percentage points to the rise in the price of products imported from Europe, Japan and other non-dollar countries.


The fixed dollar peg is fueling inflation further through an indirect effect that maybe even greater. It is forcing the GCCGCCCooperation Council for the Arab States of central banks to cut interest rates in line with the US Fed, thus causing money supply to increase. But, what is needed instead is to tighten money supply and raise interest rates. Qatar, for example, has lowered its key policy interest rates to 2.00% in line with the US Fed, from 5% only a few months ago. As a result, we are seeing money supply growth at double-digit rates in recent years (on top of the already 37% growth in 2006).


Too much liquidity caused by the dollar peg policy is driving domestic private and public spending to excessive levels thus generating unsustainably high growth in demand for locally produced goods, services and housing. Combined with supply bottlenecks it takes time to build new manufacturing facilities, or build new housing this has fueled inflation in certain sectors. The biggest culprit in this area are rental, housing and property prices.


The Riyal peg is directly responsible for two of the above four causes of inflation (nos. 2 and 3), and indirectly responsible in the two remaining cases.


Why is inflation bad?
Inflation, in general, hurts the economy by reducing the purchasing power of consumers and wage earners, and by increasing the cost of business for companies.


Inflation begets further inflation. It is a disease that spreads easily. As prices of raw materials and consumer goods rise, businesses will raise their own prices and workers will demand higher wages to compensate. Thus, what may have started in particular sectors (e.g., oil, property), spreads to other segments of the market.


What Economists dread most in this context is if inflation gets built into people's expectations and thus become a self-fulfilling prophesy. When businesses expect inflation to continue, they incorporate it into their business and pricing decisions. Similarly, when workers expect inflation to stay, they incorporate that into their wage demands. The combined end result is not just inflation, but spiraling inflation.


This is what happened in the US in the 1970s ever increasing double-digit inflation combined with high unemployment - giving rise to the term 'stagflation'. The world is again in the throes of yet another phase of stagflation, and, as in the 1970s, the solution is to raise interest rates to high levels. In the US, the then-Fed Chairman, Volcker, raised interest rates to double-digit levels, and only then succeeded in killing inflation and inflationary expectations. Unfortunately, raising interest rates is an option not available to the GCCGCCCooperation Council for the Arab States of the Gulf given their fixed pegs.


Unchecked inflation will have further consequences for the GCC
Inflation in the GCCGCCCooperation Council for the Arab States of the Gulf labor force are expatriates and continued inflation makes it less desirable for them to come or continue staying in this region. Inflation and the dollar peg hurts expatriate labor in two ways: it erodes the local purchasing power of their wages and salaries, and they are hit with a double whammy when the value of their remittances in their home countries fall because of the Riyal depreciation. Continued inflation thus will threaten the growth potential of the GCCGCCCooperation Council for the Arab States of the Gulf
AGCC


if, as some countries are finding out, it starts drying up the supply of labor from abroad and creates unrest locally.


The

-variety of inflation, driven as it is by excessive liquidity, is also responsible for an asset price bubble, that has other troubling consequences. Asset price bubbles are not good not only because they end up bursting eventually but also because they distort economic signals and divert too much of the economy's wealth and resources into the bubble sectors. Unfortunately, too often policymakers tend to ignore asset price bubbles before it is too late because many people get enriched (albeit, at the expense of others) and it creates an aura of success.


Can a revaluation stop inflation?
There are really only two ways that GCCGCCCooperation Council for the Arab States of the Gulf countries can eliminate inflation. Either, they cut government spending, or they pursue an independent monetary policy and raise interest rates.

Unfortunately, the second option is not available to the GCCGCCCooperation Council for the Arab States of the Gulf AGCC as long as their currencies are tied to the dollar (or any currency). This means, cutting spending is the only option left, and most GCCGCCCooperation Council for the Arab States of the Gulf governments are unwilling to do that either because it means slower growth or it is difficult given the large oil revenues.


However, doing nothing is not a good option either because it means continued high inflation. Even worse is what some GCCGCCCooperation Council for the Arab States of the Gulf countries are doing, namely, subsidy and salary increases because they will actually end up fueling inflation and result in further demands for salary and subsidy increases in the future.


A one-off revaluation will not eliminate future inflation, but it will eliminate the impact of past inflation, without fueling more inflation. A 20-30 percent revaluation will restore the purchasing power of expatriate wages and the consumers. Given the policy dilemma, it buys time for the authorities to come up with more durable solutions. And, it demonstrates to the public that the authorities take market signals and concerns seriously.


Hold your breath, the dollar is strengthening Naysayers, i.e., those who say that the dollar is already coming back up, will say that a revaluation is no longer necessary. However, they may not want to hold their breath for long. The life history of the euro, which has been in existence since January 1, 1999, shows little cause for optimism in a sustained dollar recovery, given the underlying fundamentals. Of course, one can never say never, but the chart shows that the dollar has been declining against the euro for most of the latter's life, starting as far back as 2001. In fact, the latest bout of dollar strength doesn't even register as a big blip in the chart, and it shows a number of previous failed attempts.


That the dollar's decline has been long and sustained suggests fundamental forces at work against the dollar, which are no mystery at all huge US government budget deficits as a succession of US presidents cut taxes to the bone, bloated further by the massive spending on the "war on terror', an almost "enforced" globalization of the world by none other than the US itself that, ironically, has moved jobs and manufacturing away from America to the emerging world, and has come back to haunt it in the form of a massive US trade deficit (reaching as high a $800 billion in recent years), that together with interest rates so low that no one wants to hold dollars anymore.


But a more fundamental issue is at stake here. Any currency will always have ups and downs. Why should the GCCGCCCooperation Council for the Arab States of the Gulf
AGCC which has become an economic might in its own right in recent years, tie its currency and its economic fortunes to any other currency, let alone a falling one? The dollar may have been mighty at one time, but now there is also the Euro.


The Puzzle
In our view, there is really little economic justification for not revaluing the GCCGCCCooperation Council for the Arab States of the Gulf
currencies, the recent strength of the dollar notwithstanding. Economist would never say that a price set decades ago is still right except by pure accident. Businesses would never last if they kept their prices fixed for decades. This should also be true of the price of currencies.


The pegging of GCCGCCCooperation Council for the Arab States of the Gulf currencies to the dollar in the mid-1980s made sense for a number of reasons, but those reasons are now mostly gone. Back in the 1980s, the GCCGCCCooperation Council for the Arab States of the Gulf was a minor economic player in the world. Their currencies and their central banks were untested, inexperienced and globally insignificant.

The main issue for them at the time was to preserve the global purchasing power of the single-most important asset they owned at the time oil, and to build up currency credibility and stability. Thus, it made sense to tie oil prices and their currencies to the dollar, the currency of global trade. Now, the situation has changed: the dollar is no longer the king, the GCCGCCCooperation Council for the Arab States of the Gulf has diversified its wealth significantly away from oil, together the GCCGCCCooperation Council for the Arab States of the Gulf
AGCC
Region currency prices fixed against a falling dollar has hardened in recent months. Authorities have instead put their resolve back into the GCCGCCCooperation Council for the Arab States of the Gulf monetary union by the original 2010 deadline. Until recently, this was thought to be almost impossible by most observers, given that Oman had already voted to opt out and Bahrain and Kuwait were having reservations. In fact, it may have become even harder to achieve given that Qatar, the UAE, and even Saudi Arabia, much to the latter's consternation, will fail to meet the existing convergence criterion on inflation (i.e. no more than 2% away from the GCCGCCCooperation Council for the Arab States of the Gulf average, which is currently around 6.9%).


Some red herrings on the road to monetary union
A number of "red herrings" (i.e., myths) have been floated around about why a revaluation or de-pegging will not work:


Disturbing the pegs now will cause difficulty on the road to monetary union.


But, all the major currencies of the European Monetary Union were floating in the run up to the Euro and it did not hurt the euro monetary union. All that is required for monetary union, as for the euro, is for the GCCGCCCooperation Council for the Arab States of the Gulf currencies to set a fixed ratio among themselves, NOT a fixed ratio to currencies outside.


The Riyal peg is not the main reason for inflation. But, it is directly behind two of the four main reasons and indirectly behind the other two.


A fixed exchange rate regime has served us well. This is fine, but this is not the same as saying that the same rate established decades ago still serves us well. Moreover, it is time for the GCCGCCCooperation Council for the Arab States of the Gulf to stand on its own feet, as a new emerging global economic bloc, and establish its own future course.


Kuwait has revalued its currency but still shows rising inflation. The Kuwaiti revaluation was too little too late, and unlikely to blunt inflation anyway because they still continue to match US Fed rate cuts (so the currency does not revalue too much?).


We see four possible reasons for the GCCGCCCooperation Council for the Arab States of the Gulf resolve against revaluation:


Political, i.e., do not hit the dollar when it is already down.


Revaluation will erode the value of US dollar assets held by the GCCGCCCooperation Council for the Arab States of the Gulf.


GCCGCCCooperation Council for the Arab States of the Gulf
oil revenue, and hence, government budgets, will be worth less in local currencies, thus, forcing governments to cut expenditure. But, this is actually good because it will cut back on inflation pressure.


GCCGCCCooperation Council for the Arab States of the Gulf
non-oil exports will be hurt if the local currencies are allowed to appreciate.


Inflation is benefitting some segments of society, e.g. asset-owners and businesses.


There is no place to hide
The uncertainty regarding the dollar peg and inflation is making life difficult for businesses, workers, consumers and financial institutions alike. Market expectations of a revaluation and speculation will not die down as long as inflation continues and a credible anti-inflationary policy is not implemented and explained.

By Khan zahid

© The Peninsula 2008

Committee to hold meeting on common GCC currency

Committee to hold meeting on common GCC currency
DOHA, Sept 5, (KUNA): The technical committee of the Gulf Monetary Union is due to hold its 25th meeting in Doha next Sunday to discuss the issue of GCC single currency, it was officially reported. The committee, during its two-day meeting, is scheduled to discuss drafting regulations for the authority that would be assigned to issue the common current for the member states of the Gulf Cooperation Council. The special authority will be also tasked with working out various mechanisms of the process, such as the ways of ciruculating the single currency, setting the rate for the currency in addition to various other supervisary tasks. The authority that has been picked for the task is the GCC committee for supervision on the banking systems. The GCC secretariat general anticipates that various procedures for the issuance of the single currency will be finalized this year. A GCC central bank is due to established at least six months before the issuance of the common currency.

GCC monetary union unlikely by 2010: UAE

DUBAI - With only about two years to go, Gulf Arab oil producers may not be able to meet the target for a monetary union by 2010, and are unlikely to sever their dollar pegs because the US currency is appreciating against other major currencies.

UAE Central Bank Governor Sultan bin Nasser Al Suwaidi stated this on Thursday, and stressed that the country’s economy would grow at 6.6 per cent this year and remain strong until 2009. Last year’s economic growth was 7.4 per cent.

In a keynote speech before a business conference, Al Suwaidi said the monetary union would be implemented in three stages with the last one involving the implementation of similar laws among the Gulf countries.

“If we achieve the first two stages to monetary union by 2010, then that will be enough,” said Al Suwaidi, who gave a keynote speech at the last of the two-day The 33rd Japan Cooperation Forum for the Middle East (JCCME).

He added that the first and second stages would reduce or even eliminate the cost of the exchange cross-rates as well as realise the free capital flows between the Gulf countries.

Al Suwaidi said, meanwhile, the rapid economic growth in the region could encourage the Sovereign Wealth Funds (SWFs) of GCC Arab governments to invest more of their assets in the domestic market.

He added this could start off a new regional development cycle. Among the Gulf Cooperation Council member-countries, only Kuwait has abandoned the dollar-peg while Oman said in 2006 that it would not join the monetary union.

The other GCC members are Saudi Arabia, Bahrain, the UAE and Qatar. “The current level of interest rates in the GCC actually creates an environment of ultra loose monetary policy with highly negative interest rates, which can only be conducive to massive credit growth,” said Philippe Dauba-Pantanacce, a Dubaibased senior economist for the Middle East & North Africa, Global Markets, at Standard Chartered Bank, in an earlier interview.

The UAE Central Bank has a two-per cent repurchase rate, or lending rates to commercial banks, since May 1. It has slashed this repo rate by 275 basis points since setting it at 4.75 per cent on November 29 following a revamped of its monetary policy tools.

The country has replaced a daily sale of fixed-rate certificates of deposit with the auction, the results of which have not been released.

jose@khaleejtimes.com

The UAE Central BankUAE Central BankCentral Bank of the United Arab Emirates

The UAE Central BankUAE Central BankCentral Bank of the United Arab Emirates
UAE Central Bank

does not have a magic solution to soaring inflation in the country and any sudden currency changes could trigger monetary turmoil in the short term, a government report said yesterday.

Revaluing or de-pegging the dirham from the ailing US dollar remains a very difficult decision and such a move will not alone tackle inflation, which surged above 11 per cent last year from 9.5 per cent in 2006 and less than five per cent in previous years, the Department of Planning and Economy (DPE) said in its weekly report on the dirham peg and inflation in the UAE.

While stemming inflation requires a set of measures, changes in the UAE monetary policies appear to be more complex than any other country in the six-nation Gulf Cooperation Council (GCC), the report said.

It said the Central Bank had already made clear that there are no plans at present to unpeg the dirham from the dollar on the grounds that about 70 per cent of the country's foreign trade is in the US currency, a large part of the UAE's foreign assets are in dollar, more than 95 per cent of its official reserves are in dollar and the peg has long been a factor of stability.

Magic solution
"Therefore, it should be said in conclusion that the UAE Central BankUAE Central BankCentral Bank of the United Arab Emirates

does not possess the magical stick to stop inflation. Rather, it is a problem that should be tackled by more than one institution at the federal and local levels. Even the private sector and individual consumers have a role to play," it said.

According to the report, pegging the dirham to the dollar has been justified by many internal and external factors and that any decision to end the link requires alternative monetary policies that would curb inflation. But it warned:"Any major change in the exchange rate will cause financial and monetary unrest in the short term... available options do not seem attractive for the time being and changes of the monetary policies in the country look more complex than any other country of the GCC."

The report said the role of the UAE Central BankUAE Central BankCentral Bank of the United Arab Emirates

, like any central bank in the world, is to preserve the value of the national currency and keep inflation in check. However, the roles of central national banks are being curtailed by the assertive influences of globalisation sweeping across the world, it added.

Currency pressure
It noted that the UAE dirham has come under increased pressure as a result of the flow of oil revenues, adding that inflation has been partly fuelled by the high cost of imports from non-dollar markets.

While this imported inflation can best be reduced either by scaling down imports or by diversifying sources, such a decision requires well-thought out and long-term strategies, DPE said.

Moreover, the report believes any inflation ensuing from devaluation of local currency can only be redressed through adoption of a basket of alternative world currencies, but at carefully studied and fixed rates.

"More importantly, it should be said that despite the enormous pressures put on the UAE economy by the dollar woes, any abrupt change in monetary policies will not suffice in itself to bring down inflation," it said. "On the contrary, such a haphazard move would affect the competitive edge of the UAE's non-oil exports. At the same time, such a decision will affect the overall productivity and would touch on salaries and remittances."

Devaluation
According to DPE, oil revenues will remain unaffected as they are valued in dollars but under this scenario, a decision to devalue the dirham by little less than its current value would seem a good option as this would boost the competitiveness of the country's exports and re-exports.

"De-valuation of the dirham would not entirely be woesome because many sectors of the local economy will stand to benefit from such a decision.

"Having said that, it remains to be mentioned that any decision to change the monetary policies or even devalue the dirham, no matter how little that devaluation might be, would require a comprehensive and technical studies that encompass the pros and cons... an attempt to decide the future of the UAE's national currency will remain a complex task. "

The report, citing official comments, said a close look at the UAE's monetary and financial experience during the past three years would reveal that the dollar pegging policy has had some positive impacts.

Not easy
"Thus, to drop the dollar would not be so easy a decision to take because it would require some robust alternative policies aimed at curbing inflation and volatility in exchange rate... this dilemma, however, does not mean that the UAE Central BankUAE Central BankCentral Bank of the United Arab Emirates

would sit by idly while inflation continues to rip local markets apart. While remaining pegged to the dollar, there are financial and monetary policies that the UAE could adopt. One of them is to set a limit for liquidity growth as per the needs of local economy."

It recalled that when the UAE decided to peg the dirham to the dollar more than two decades ago, there were a host of economic, and financial and monetary justifications.

The pegging proved to be a safe haven for a long time, ensuring credibility, stability and boosting investments and investor confidence, it said.

"Furthermore, a review of these justifications will show that the argument to retain the pegging at fixed rate was fuelled by some objectives conditions. Prime among these conditions was the pricing of oil and other essential commodities in dollar. Indeed, 60 per cent of dollar reserves are outside the US.

Additionally, UAE cash surplus and financial accounts are all in dollars.

"What is important in the complex issue of whether or not to de-peg is the position of the UAE Central BankUAE Central BankCentral Bank of the United Arab Emirates, which maintains that de-pegging will have adverse consequences that the national economy would not afford.

"The Central Bank maintains that monetary stability, which has long been the UAE's strength, will be tampered with, at least for the time being, if de-pegging is adopted."

Basket of currencies
Despite the positive aspects of the link to the dollar, the pegging of any national currency against a foreign basket is a double-edged sword, DPE said, citing recent Central Bank remarks. It noted that the decline in the US dollar benefited UAE non-oil exports but made the country's imports from other markets costlier.

"Thus, the most dangerous impact of the dollar decline is imported inflation that comes with it as a result of huge fall in the dollar exchange rate against other currencies. Imported inflation terribly affects economic activities and the gross domestic product. This is not to mention the spiralling prices of consumer goods that are purchased with other major currencies," DPE said.

"In short, it is difficult to claim that any one particular monetary policy would be ideal for the UAE. However, if the US dollar continues to decline, the UAE's economy will continue to pay the price as a result of continued dirham pegging with the weakening dollar." It stressed that such a scenario might require certain practical measures to mitigate the negative impact.

"One way of tacking such a situation would be to tie the dirham to a basket of major currencies, including the dollar. This step would boost the international market value of the dirham. Such a decision would, of course, have some short-term effects. Nevertheless, it would achieve a better economic stability. However, it should be acknowledged that such a decision would be one of the most difficult and complex economic decisions to take. "As mentioned earlier, the decision to de-peg the dollar is not an easy one. It requires a set of alterative monetary policies to check inflation and exchange rate. Similarly, it is hard to assert categorically that a single currency anchor is the best system for the UAE."


Dollar has served GCC well
In its comment on the GCC as a whole, the report considered that the dollar pegging had served member states well for decades.

But it also noted that the pegging was adopted when oil prices were low and the greenback still at the height of its strength.

"Today, the dollar is falling relentlessly and oil prices are skyrocketing. This new reality calls for a rethink of monetary policies. GCC states need to peg against a basket of world currencies, taking into account the latest trading patterns which tend to be bent towards the euro zone and Asia.

"With oil windfall entering its fifth year in a row, and with the dollar continuing to decline, it is clear that GCC's monetary polices will face a problem of policy alignment. This problem will definitely affect the single currency union." It warned that a single GCC currency could not be without a decision by the six members to align their monetary, financial, and banking policies.

"This is the single most important objective that needs to be attained now. This alignment may require certain standards in the long-term. These standards include, among others, keeping inflation rate below two per cent at the average, maintaining budget deficit at not more than three per cent of the GDP and keeping the general GCC credit at 60 per cent," it said.

"The wider interest of the GCC countries necessitates amendments in key aspects of economic policies, including adjustment of exchange rates against local currencies. ...as the dollar continues to fall, the GCC states need to face the repercussion by adopting a unified stand. It should be noted that these states pegged their currencies to the dollar for objectives reasons."

The Dirham peg: Reasons and motives
Objectives and special reasons
Dirham peg has been the bedrock of a stable monetary stability. The economy enjoyed long credibility as a result.

Investor confidence in the local currency maintained
UAE's financial assets in dollars
70 per cent of foreign trade is in dollars
More than 95 of reserves is in dollar
International oil trade is priced in dollars

General motives
The dollar remains the single most important hard currency in the world
It is the currency of international trade
It is the currency of the US, which accounts for about 27 per cent of the world trade
66 per cent of world reserves are in dollars
60 per cent of the greenback is outside the US

Side effects of dollar peg
In view of US economic woes, dirham exchange rate is loosing some of its credibility, a trend that might have negative impact on monetary stability (As in 1977-1976)
That the dirham exchange rate has remained fixed against the dollar will require the Central Bank to be continually ready to intervene in the exchange market. This will require huge foreign assets reserves. With the dollar continuing to decline, future exchanges rate trends will continue to be uncertain. This will cause problems to economic planning
Euro has begun to compete with the dollar at the global level. It is a force to reckon with when considering the exchange rate

De-pegging or no de-pegging?
Reasons for taking the decision
Enhancing the efficiency of monetary policy to regulate economic activities
Curbing inflation and mitigating its effects at the domestic level
Mitigating the effects of dollar depreciation on domestic conditions.

Reasons for deferring the decision
Pegging is justified by many internal and external factors
De-pegging requires alternative monetary policies, which would curb inflation and check exchange rates
Changes in UAE's foreign trade, which helped to contain inflation
Taking risk by adjusting exchange rate is one of the tools for monetary policy
Any major change in the exchange rate will cause financial and monetary unrest in the short term
Available options do not seem attractive (currencies basket/floating, etc)
Difficulty in managing exchange rates in the context of other option
De-pegging requires regional and international consensus (GCC single currency)
De-pegging requires delicate balances
Changes of monetary policies in the UAE look more complex than any other country in the GCC

Future of dollar: further depreciation predicted
The dollar lost 40 per cent of its value since 2000
US monetary policy welcomes more reduction
Dollar weakness reduces cost of US exports
Dollar weakness helps US trade balance
Weakening dollar reduces cost of US assets
There is a global tendency to get rid of the dollar in favour of other currencies

By Nadim Kawach

© Emirates Business 24/7 2008

Rising inflation main hurdle to currency union

Rising inflation main hurdle to currency union
By Issac John (Deputy Business Editor)

11 June 2008




DUBAI — Soaring rates of inflation in the Gulf, projected to average at 11 per cent in 2008, and ease to around nine per cent in 2009, pose the main challenge to GCC currency union, economists said.


In the wake of GCC Central Bankers breakthrough agreement on Monday setting up a regional central bank, analysts said the prevailing double-digit inflation rates in the UAE and Qatar will continue to be one of the main hurdles in meeting the convergence criterion on inflation, which is a critical aspect of successful currency union.

Marios Maratheftis, Regional Head of Research, Standard Chartered Bank, told Khaleej Times that the most important obstacle for the common currency was the absence of GCC-wide institution. “By 2010 we understand the central bank for the GCC will be in operation, may be the common currency will follow later but for us what is important is the establishment of an institution. I think the development is a breakthrough and very important development indeed.”

According to the official convergence criteria, an inflation rate of no more than two percentage points above the regional average is allowed. "On the basis of 2007 data, Qatar is 6.4 points above the regional average inflation rate and the UAE is 3.5 points above it. Based on our forecasts for 2008 inflation, the UAE is likely to move back to within two points (as the regional average shifts higher this year), but Qatar’s differential is likely to remain in excess of three points," said Samba, a leading Saudi bank.

To meet the target for inflation, although Qatar has proposed stripping out rents from the inflation measure, it has met a cool response from other GCC members.

Analysts said the currency union presents the GCC with an imperative to define a more appropriate level for their exchange rates to ensure that they establish a realistic starting point.

"A satisfactory initial alignment of exchange rates is an essential, if not sufficient, condition for the viability of a GCC common currency. However, a currency union need not involve a fixed peg to the dollar (nor any other currency) and the project therefore also presents an opportunity to introduce a more flexible regime. This would allow the proposed GCC central bank some control over interest rates, and enable it to manage domestic demand more effectively. The end result would likely be more stable and predictable price growth, laying the foundations for sustainable, investment-led economic growth over the long term," the banks economist said.

Since the other convergence criteria, including limiting budget deficits to no greater than three per cent of GDP and public debt burdens of less than 60 per cent of GDP, now lack relevance given the GCC’s booming economies and robust financial indicators, inflation criterion is the main stumbling block to GCC currency union, analysts point out.

Observing that the most pressing challenge facing GCC economies is inflation, economists said a key factor bearing on skyrocketing price stems from the fixed peg to the US dollar. Another factor stoking inflation is increased government spending which has resulted in rapid liquidity growth across the GCC.

"A third factor contributing to demand pressures is the rapid growth of bank credit to the private sector, reflecting the greatly expanding role of the private sector in the regional economic and investment boom. A combination of promising investment opportunities together with highly liquid financial institutions have propelled annualised rates of credit growth to 35 percent or more across the region," they said

GCC central bankers to discuss MU

GCC central bankers to discuss MU
7 June 2008

DUBAI - Gulf Arab central bankers meet on Monday for the second time in less than three months to pick up the pace of Monetary Union (MU) as they resist pressure to drop their dollar pegs amid soaring inflation.

The six-member Gulf Cooperation Council (GCC) will try to flesh out technical issues in their extraordinary general meeting to come up with a final document on monetary union to be presented to the region's leaders by year-end.

"The nature of the meeting is very technical and detailed and the focus will be on establishing the institutional and legal framework for monetary union," said a GCC secretariat official who declined to be identified.

Since last year, the dollar has plunged against the euro, the US Federal Reserve has slashed interest rates six times, and inflation in Qatar and Saudi Arabia have hit record highs.

The need to maintain dollar pegs has forced Gulf countries to cut interest rates in tandem with the Federal Reserve even though their economies are booming, their main export, oil, is priced in dollars and inflation is spiralling.

At their regular meeting in April, the governors discussed removing obstacles to longstanding single currency plans in an effort to prevent unilateral revaluation as the pressure mounts.

Of the six countries, Oman has said it would not join the union at all and Kuwait dropped its dollar peg in 2007, throwing the plan into disarray.

The GCC comprises Saudi Arabia, the UAE, Kuwait, Qatar, Oman and Bahrain. Qatar, the world's biggest exporter of liquefied natural gas, holds the revolving chair.

"This is a continuation of our last meeting ... we will follow up on the progress of the technical committees," Bahrain's central bank governor Rasheed Al Maraj said last week when asked by Reuters on the meeting's agenda. "We will not be discussing tackling inflation."

Curbing speculation: Shaikh Mohammed bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, and Sultan Nasser bin Sultan Al Suweidi, central bank governor, both reiterated this week the UAE had no plans to drop its dollar peg or revalue after meeting US Treasury Secretary Henry Paulson.

Paulson toured Gulf Arab countries, including regional power and key US ally Saudi Arabia, to defend the status of the dollar as the world's reserve currency.

An adviser to the Ruler of Qatar, another Gulf Arab state that pegs its currency to the ailing dollar, said the country needed to act over the dollar peg without being more specific.

"The case for monetary reform is strong but I don't sense that Gulf leaders are persuaded by the arguments for change... There is also a strong preference for joint action over unilateral adjustment," said Simon Williams, regional economist at HSBC.

"I do sense renewed enthusiasm for the currency union but what the market will be looking for is evidence that renewed support for the project is translated into concrete decisions."

Progress on key policy issues such as the type of currency regime, how the central bank will be organised, what powers it might enjoy and what tools it might have at its disposal would be a significant step forward on the road to monetary union.

Ensuring the central bankers reach common ground on the technical aspects of monetary union is key to maintaining the fresh impetus of the last few months and reducing the chance of individual states moving ahead unilaterally.

"We recommend a revaluation of the UAE (dirham)," Gerard Lyons, chief economist at Standard Chartered Bank said on Thursday. "If it doesn't happen the region could see a boom that will become a bust." - Reuters

Qatar must depeg, gov't advisor says

Qatar must depeg, gov't advisor says
by Dylan Bowman and Reuters on Saturday, 31 May 2008
DROP PEG: Al-Ibrahim said Qatar must depeg from the dollar due to the Gulf state's soaring economic growth. (Getty Images)Qatar has to delink its currency from the weakening US dollar as the Gulf Arab country's economy is growing, an economic policy adviser to the country's emir said in published remarks.

"We have to delink," Ibrahim Al-Ibrahim was quoted as saying by the London-based magazine Meed, published late on Friday.

"It does not make sense to stay linked to a currency that is declining while our economy is growing. At a time when our currency should be going up, it is going down."

Al-Ibrahim, economic adviser to Emir Sheikh Hamad bin Khalifa Al-Thani, said he is "working hard" to convince the government that keeping the dollar peg is not in its interest, but that any action should be taken in coordination with other Gulf Arabs.

"The problem is really how to deal with Gulf Arab countries in terms of the objective of having one currency," he said. "We do not want to do anything that will disturb that."

Al-Ibrahim's comments come just a matter of days after Qatar's finance minister flatly dismissed claims made by Merrill Lynch that the Gulf state could soon depeg, labelling the report “baseless”.

“This report is completely untrue and baseless,” Kamal told reporters after a GCC cooperation meeting held in Doha.

Yusus Kamal was responding to a report by the US investment bank that claimed the US government had given Qatar and neighbour the UAE the green light to drop their currency pegs to the dollar to help battle record inflation.

The report said the two Gulf states would move to a currency basket within the next six months.

All Gulf states, bar Kuwait, peg their currencies to the ailing dollar. The dollar peg has been blamed for increasing the cost of imports and restricting the central bank's ability to fight inflation.

Gulf states' dollar pegs forces central banks to track US monetary policy to maintain the relative attractiveness of their currencies.

The US Federal Reserve has been slashing interest rates since September to stave off recession at a time when Gulf central banks should be hiking rates to rein in inflation.

Inflation in Qatar, which has yet to publish first-quarter data, rose slightly to 13.74% at the end of December, its second-highest figure on record, as rents and food prices surged.

Qatar is trying to cap inflation at its current level of 13.7%, below a peak of 15% seen earlier this year, the country's finance minister said this month.

US dodges issue of Gulf depegging

US dodges issue of Gulf depegging
by Dylan Bowman and Reuters on Saturday, 31 May 2008
DODGING ISSUE: Paulson (pictured) said any move to depeg from the ailing US currency would beUS Treasury Secretary Henry Paulson said on Saturday the dollar peg for currencies in the Gulf Arab countries had served the region well and any changes to the peg would be a sovereign matter.

Dollar pegs in all Gulf Arab states except Kuwait force their respective central banks to match US interest rate cuts, and has helped fuel inflation as their economies are booming due to record oil prices.

This also reduces their purchasing power for goods denominated in other currencies.

Story continues below ↓
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Asked about his concerns over the dollar peg, Paulson, on a visit to Saudi Arabia, Qatar and the UAE, told a news conference: "That is a sovereign decision... The dollar peg, I think, has served this country [Saudi Arabia] and this region well. That speaks for itself."

Paulson's visit follows a report by Merrill Lynch, citing a US Tresury report to Congress, that the US government has given Gulf states the green light to make changes to their dollar-pegged foreign exchange policies, recognising inflation as a problem.

The report by the US investment bank said the UAE and Qatar would move to a currency basket within the next six months, while Saudi Arabia was unlikely to follow until late next year.

Qatar's top economic policy adviser Ibraham Al-Ibrahim was quoted late on Friday as saying that Qatar must de-link its currency from the dollar peg.

But Saudi Finance Minister Ibrahim Al-Assaf, who joined Paulson in the news conference after a series of meetings, reaffirmed his committment to the dollar peg.

"We have no intention of depegging or revaluation," Al-Assaf said. "As Mr. secretary [Paulson] said... it's a position that has served us well. [The peg to the dollar] has served us well and we look at the long-term interest of Saudi Arabia."

Turning to the price of oil, which hit a record high of more than $135 a barrel last week, Paulson reiterated his calls for additional investment in oil producing countries, particularly from foreign sources, to help increase production.

"There is no doubt that the current prices are a burden on economies around the world and a burden on people around the world," Paulson said.

Al-Assaf agreed, saying Saudi Arabia was investing billions of dollars to increase both upstream crude oil production and downstream refining capacity to help meet global demand.

"We don't like these extreme volatilities in the [oil] market. They are not good for the consuming countries and they are not good for the producing countries."

UAE to keep peg despite US go-ahead for currency reform

UAE to keep peg despite US go-ahead for currency reform

Khaleej Times - 29/05/2008

(MENAFN - Khaleej Times) Amid reports that US has given the green signal for the depegging of GCC currencies from a tumbling dollar, the UAE reaffirmed its stance on keeping its currency pegged to the greenback.

UAE Central Bank Governor Sultan Bin Nasser Al Suweidi, responding to remarks made by Merrill Lynch about a recent US Treasury report to Congress, said there was not any move or trend for a depeg or a revaluation.

Quoting the US Treasury report, Merrill Lynch has said the US gave the GCC the green light to change their foreign exchange policies, a move which will have far reaching impact on the currency valuations of the UAE and other Gulf countries. Al Suweidi was quoted by a local Arabic newspaper that the Merrill Lynch report was "weak and lacks transparency."

The report by the US Treasury to Congress on international economic and exchange rate policies, also known as the FX manipulation report, indicated that US has effectively given Gulf countries, reeling under imported inflation resulting from a depreciation of their dollar pegged currencies, the go ahead for making changes to their foreign exchange policies.

An analyst with Merrill Lynch has said the US is helping to lift the political barriers to exchange rate regime changes in the region. "Indeed, if the US were comfortable with the idea of GCC currency appreciation, we believe it would ultimately make it much easier for the GCC authorities to break the dollar peg from a diplomatic standpoint. This is supportive of our bullish view on the GCC currencies. We have re-entered our trade recommendation of a six-month forwards basket of long Kuwait dinar and UAE dirham versus short dollar."

In its report entitled "U.S. Green Light for the GCC," the investment bank said the UAE and Qatar will probably move to a currency basket in the next few months, with their respective currencies appreciating five percent before the end of the year.

According to Merrill Lynch, the US report highlights the rigidities in GCC currencies. "This represents a modest change in focus, but we believe a big signal for the currencies of the GCC. The report also highlights the increased comfort regarding the dollar. There had been market concerns that the US was reluctant to push the GCC countries into a change in currency regime given the possible negative effects on the greenback. This report suggests that those risks have lessened," ML said.

"The report has not cited any country as a manipulator since China in 1994. Studies show that being named is partly due to fundamentals but also to politics. Thus, we believe the new inclusion in the findings section of the report is important."

ML said: "With the US sending a green light for currency regime change, the focus may shift to domestic constraints. We recognise that there may still be some significant domestic resistance to exchange rate regime changes, but overall we believe that a number of GCC countries will ultimately be forced by the market to let their currencies strengthen."

The Treasury report highlighted the increase in inflation in GCC states which has intensified discussions in the region on revaluation or adjustments in currency rate regimes.

"As stressed in the Treasury report, some adjustment to real effective exchange rates in the region - especially in Qatar and the UAE - is taking place through rising prices. The root causes of inflation in the GCC are multiple, including higher food prices, strong demand pressures and abundant domestic liquidity.

US warms up to Gulf currency reforms

US warms up to Gulf currency reforms
By Babu Das Augustine, Banking Editor
Published: May 26, 2008, 00:02


Dubai: The US Treasury's recent report to Congress on International Economic and Exchange Rate Policies (FX manipulation report) hints at a potential US nod for currency reforms in the Gulf.

Analysts said that the report points to a shift in the US Treasury's approach to Gulf countries' exchange rate policies in the context of rising inflation and upward pressure on real exchange rates.

"The US recognises significant appreciation pressures on the Gulf Cooperation Council (GCC) countries. From a fundamental standpoint, we believe the US authorities have hinted that there is a need for more exchange rate flexibility," said Emma Lawson and Benoit Anne, currency analysts of Merrill Lynch.


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The report does not suggest any solution to the undervalued Gulf currencies. However, analysts believe that the very fact that the Treasury has admitted that the Gulf currencies are undervalued hints at political support for change.

"The latest report highlights the rigidities in the GCC currencies, specifically Saudi Arabia. This represents a modest change in focus, but we believe a big signal for the currencies of the GCC," said Lawson and Anne.


The US investment bank said the UAE and Qatar will probably move to a currency basket in the next few months, with their respective currencies appreciating five per cent before the end of the year. Saudi Arabia is unlikely to follow until late next year.

The Treasury report recognises the need for some adjustment to real effective exchange rates in the region, especially in the UAE and Qatar where prices are rising as a result of rigid exchange rates.

"We believe that if the US were comfortable with the idea of GCC currency appreciation, it would ultimately make it much easier for the GCC authorities to break the dollar peg from a diplomatic standpoint," Merrill Lynch said.

Objectives: fx manipulation report

The FX Manipulation Report was aimed at determining if trading partners were manipulating currencies but also to outline the currency practices of the major trading partners of the US.

The report examines whether countries manipulate the exchange rates for purposes of preventing the balance of payments adjustments or gaining unfair competitive advantage in international trade.

If any country is found to be a currency manipulator, it is required to hold talks with the US government.

The report has not cited any country as a manipulator since 1994 (China). Since the launch of the report 14 years ago, the only countries that have been asked to modify their foreign exchange stances have been China, Japan, South Korea, Taiwan, Malaysia, Hong Kong, Singapore and Russia.

Do you expect the US to support

Ditching dollar peg a boon for region

Ditching dollar peg a boon for region
by Talal Malik on Monday, 26 May 2008
POSITIVE MOVE: Gulf states depegging their currencies from the US dolar would be a boon for the region, analysts said. (Getty Images)Gulf states looking at depegging or revaluing their currencies will find the impact is largely positive for the economy, senior economists told ArabianBusiness.com on Monday.

US investment bank Merrill Lynch said on Sunday that the UAE and Qatar would probably depeg from the US dollar and move to a currency basket in the next few months, after the US gave the go-ahead in order to fight inflation.

All Gulf states, bar Kuwait, peg their currencies to the dollar, which forces central banks to follow US monetary policy and limits their ability to bring down inflation, which has soared to record highs across the Gulf.


"I think there would very few losers from an adjustment because the region is so import-dependent and because such a large proportion of the population is expatriate and remitting much of their income," said Simon Williams, a Dubai-based economist at HSBC.

"Overall, I think it will be positive if we see any kind of monetary policy tightening," said Marios Maratheftis, regional head of research at Standard Chartered.

"If something is better for the economy as a whole, it's better in general for all."

Merrill Lynch said in their report 'US Green Light for the GCC' that whilst the UAE and Qatar would make the currency-basket move in the next few months, Saudi Arabia was unlikely to follow until late next year.

Citing a US Treasury report on the GCC, the investment bank said the US government had become more confident about the outlook for the dollar and therefore did not necessarily need Gulf support for its currency.

"We believe the inclusion effectively gives the GCC countries the green light for change," the bank said.

However, regional economists are divided over both whether and when any of the Gulf states will either revalue their currencies or drop the dollar-peg.

"Our view has always been consistently that the region is in need of monetary policy tightening in order to manage the [economic] boom more effectively," said Maratheftis about Standard Chartered's position on Gulf currencies.

"The challenges we're facing in the region are different to the challenges that the US economy is facing. Monetary policy is extremely loose which is leading to inflationary pressures.

"We think the best way of dealing with inflationary pressures is by changing the dollar-peg ideally. This would be the best solution but as the second-best solution we think a revaluation would also help."

Others said that neither the UAE nor Qatar were likely to move to a basket of currencies in the next few months.

"I think it's improbable in a 12-month time horizon," said Williams. "I don't think the Gulf states are yet persuaded by the arguments in favour of change.

"They are expecting a dollar recovery in the second half of the year to ease some of them pressures they have faced as a consequence of weakness over the last couple of years."

Investors piled into Gulf currencies from September on speculation that some of the states in the world's biggest oil-exporting region would follow Kuwait and sever their links to a dollar that was tumbling to record lows against the euro and other major global currencies.

"The US treasury in its report mentioned the Middle East and it has mentioned the GCC countries in particular," said Maratheftis, cautioning against over-excitement in the region’s markets.

"What people have failed to realise is that there regular publications of this report - the previous report was published in December last year and they said exactly the same thing."

Outside the region, Maratheftis perceived a Gulf depeg from the dollar could positively impact the greenback.

"I think the impact on the dollar would prove to be positive," he said. "Maybe initially there might be some negative sentiment and it might put the dollar under some moderate pressure, but I think this will be short-term."

Marios said that global economic imbalances were the main reason behind the dollar’s fall in the past seven years.

"Now we're seeing global unbalances widening as we speak, and I think stronger Middle East currencies will help deal with these global imbalances," he said.

'We have massive current account surpluses here [in the Gulf]. A stronger currency would help with the unwinding of these global imbalances and should hence be a positive for the dollar over the medium-term."

International institutions are turning away from the region because of concerns over local currency pricing.

International institutions are turning away from the region because of concerns over local currency pricing.

Experts to bring Euro perspective to Gulf

Experts to bring Euro perspective to Gulf
by Daniel Stanton on Sunday, 04 May 2008

Two senior figures involved in the European Union's currency union are to discuss what lessons can be applied in the move towards a GCC single currency.

Erwin Nierop, a lawyer by training, was involved in the establishment of three international financial institutions: the European Bank for Reconstruction and Development, the European Monetary Institute and the European Central Bank.

Most recently, he was head project manager for technical assistance to the Gulf Cooperation Council, helping to prepare a blueprint for Gulf monetary union.

Russell Krueger, a senior official at the International Monetary Fund (IMF), has extensive experience working on the statistical preparations of the European Monetary Union and has carried out research on union-building and regional financial integration projects in the Gulf, Africa and East Asia. He is currently on a one-year sabbatical leave for research on technical preparations for currency unions, with an emphasis on the lessons other regions can take from the European experience.

Both Nierop and Krueger will be speaking at the GCC Currency Forum 08, to be held on June 15 at the Monarch Hotel in Dubai.

Dr Armen Papazian, senior vice president responsible for development and innovation at Dubai International Financial Exchange (DIFX), will be delivering the keynote address.

The event is organised by ITP Events and Conferences, in association with Arabian Banking & Finance magazine. Gulf Custody Company is associate sponsor and Mayfair Pacific Asset Management is the exhibitor partner.

The event is also supported by Gulf Research Centre, the Emirates Securities and Commodities Assocation and the UAE Financial Markets Association.

Tracking GCC Savings and Borrowings...

Tracking GCC Savings and Borrowings...
Rachel Ziemba | Apr 27, 2008
With WTI Crude oil futures tipping over $120 billion on Friday, there's a lot of speculation about where the surplus revenues are going, especially those of the GCC.

A couple interesting data points
1) the IMF suggests that the aggregate current account surplus of the GCC may exceed $300 billion in 2008

2) UAE foreign debt, mostly of the private sector increased by a half in 2007.
3) UAE reserves increased by $25 billion in the month of November - more than the foreign asset growth of Saudi Arabia.

4) SAMA governor's warning that inflation might top 10% before falling.

5) Relatively few reported aquisitions by GCC sovereign funds in recent months - and no major role in recent bank recapitalizations.

All together these add up to illustrate some of the economic policy conundra, including some of the less than intended consequences of some policy responses.

With the oil price averaging over $100 a barrel so far this year - there's still a lot being saved (perhaps as much as $40-50 a barrel, for more on possible dynamics, check this post of mine from last month). Overall, with a constant oil price, even $90, domestic spending would likely catch up to new revenues in the medium term. As the economist notes in this week's cover story, most of the savings are still in government hands. And given the rate of growth of assets managed by UAE (likely over $50 billion) and Saudi central banks ($70 billion, stripping out valuation gains) in 2007, conservative, USD assets likely dominated the increase in foreign assets.
But more is staying in the region too. Some of this is being spent on capital projects to make up for decades of underinvestment - both in the energy sector and related. economic cities and attempts to diversify the economies away from oil or to higher value-added hydrocarbon products. As the IMF's John Lipsky noted this week, investment in the energy sector doesn't go as far as it used to. Despite nominal increases in spending, added capacity has been limited. But its not just government funds - the private sector is increasingly present in the megaprojects.

Other funds are being spent to maintain the standard of living of citizens in the face of rising inflation. The fiscal costs of subsidies to cushion inflationary pressures are rising too and furthering the inflationary pressures. this probably means Saudi Arabia won't hold to its pledge to rein in fiscal spending in the short term.

Yet oil @ or above $100 still means a lot of savings abroad.
So where have they been going?

- Shift to cash/safer assets. Like others they may be waiting on the sidelines. Brad Setser notes the rapid buildup of custodial holdings at the FRBNY, suggesting that central banks and sovereign funds have reverted to safe assets.

- They might have been among those investing in capital raising private equity funds. They may also have been investing in some small stakes in equity that aren't disclosed.

One trend we've seen is an increase in joint venture funds. QIA in particular has signed a number of such deals, including one in Vietnam. A local partner may open doors and help gain accss to some investments.

They might be wary of future losses. If funds were tracking the equity indices, funds could have sustained significant losses. Those countries more subject to public oversight might be wary of the fallout of investments - and are taking the opportunity for more due diligence.

Finally, they may also be worried about what Theodore Kassinger called the unpredictable, potentially volatile political environment in Congress. Together with the worries about the US economy, the decision to stay on the sidelines may be overdetermined.
If they've been wary, that doesn't mean people haven't been courting them. Frank Kane reports on the Dubai stop of the Freddie Mac roadshow in Dubai and suggests middle eastern
investors might be returning to Agency bonds. Yet Freddie Mac claims that recent investment from the Middle east has been in the 10s of billions of dollar range, with Saudi and the UAE accounting for most. nothing to sneeze at, but a small share of assets to place. This is hard to track though. The GCC didn't really participate in the EM shift to agencies of last year (at least as far as the US data story tells) and its purchases don't seem to have accelerated so far this year.

GCC foreign liabilities have been attracting more attention. On the one hand it seems a bit unusual to talk about the debt of the GCC. After all, all GCC countries are net creditors - the net CAS was well over $200 billion in 2007(IMF). The 2008 surplus will likely be much larger, about $330 billion if the IMF is right (oil price estimate $95). The investment funds and central banks added $215 billion in 2007 and are on track to add over $300 billion in 2008 (and maybe more). And that doesn't include private wealth.

But debt has been growing too. UBS notes that the UAE's foreign debt rose by 50% in 2007 to exceed $105 billion. These liabilities are dwarfed by savings, but its still an increased pace.
$13 billion is public sector borrowing, with the rest that of the private sector, especially the banks. Of course many of the banks are closely tied to the public sector and investors may assume that they won't be allowed to fail. After all, the GCC bank with the largest subprime related losses, Bahrain's Gulf international Bank is co-owned by many GCC governments and received a $1 billion capital injection after reporting a $757 million loss.

While some projects could be delayed, it seems unlikely big projects at home will fail. But credit costs may rise or delay financing. But new projects could be on hold, especially those outside. This week Emaar pulled out of a big project in Seattle in part because of financing - and perhaps questions about the health of the US property sector. In the property sector, even capital rich investors still care about debt costs, especially for multi-year projects.

Short-term cash flow may be a bigger concern. Yet, the GCC is protected from some of the refinancing issues faced by a country like Kazakhstan where challenges of rolling over foreign financing have made Kazakh banks ripe for foreign investors.

Global credit tightness could have the side benefit of deepening domestic capital markets. Markaz reports that GCC funds and state corporations are are increasing their stakes in GCC equity markets. Gulf news suggests that rather than seeking more expensive funds abroad, GCC banks may seek to raise more funds at home, issuing medium term notes to mitigate against existing maturity mismatches. This might have the side benefit of new listings for the Dubai Financial exchange. Mubadala, Abu Dhabi's economic development arm just bought almost a billion dollars of bonds issued by aldar, the abu dhabi property development arm. Mubadala has always had domestic investments - and invested abroad in joint ventures to support economic development at home - perhaps it is just a shift from equity to debt. This trend, matches that of increased domestic and international private sector involvement in the large capital projects.

Yet international trends may also limit economic policy autonomy and asset allocation choice. Speaking of the savings of the Emirates, I'm a bit delayed in noting the stunning rise of the UAE's reserves in the fourth quarter. Although the central bank has yet to officially report the data, the press quoted officials stating that the reserves reached $75 billion in November. a record $25 billion over October and almost trippling from January - November 2007. To put it in perspective the UAE added more in reserves in the month of November than Saudi Arabia's foreign asset growth ($17 billion). This increase is almost entirely the result of central bank intervention to neutralize inflows betting on a revaluation. After all, it was in November that 12m UAE dinar forwards surged and the UAE central bank governor seemed to endorse moving to a basket and away from the US dollar. No wonder Charles St-Arnaud of Morgan Stanley sees a continued fast pace of reserve accumulation and suggests that the GCC could join the ranks of the largest reserve stockpilers - without even including the over $300 billion in non-reserve assets of Saudi Arabia's Monetary Agency. He suggests GCC reserves might increase by a factor of 3-7 over the next 8 years.

But as he notes the pace of reserve growth is dependent on one major thing - the exchange rate regime and its credibility. For now at least, revaluation seems off the table - likely a fear of kicking the dollar when its down. Furthermore, the GCC monetary union seems back on the table. Yet current denials of a revaluation may be more credible and 12 month forwards have stopped rising in recent months. Yet it is another example of the way in which the dollar peg limits freedom of economic policy.

The biggest implication of this news though - is that GCC countries have yet to really diversify their currency holdings. Central banks of the GCC - including SAMA- likely added around $140 billion in assets, compared to just over $100 by sovereign wealth funds. Central banks tend to hold a much higher share of US dollars.

One data point to watch is the international banking data of the bank of international settlements released this week. It may give some indication of borrowings but also clues whether countries like Libya have increased the risk profile of their assets, as the creation of the Libyan Investment authority would indicate.

UAE decision favours single GCC currency

UAE decision favours single GCC currency

Khaleej Times - 01/01/2008

(MENAFN - Khaleej Times)The decision by the UAE government to retain the dirham peg to the US dollar demonstrates its commitment to achieving a GCC monetary union, according to a note by UAE-based firm HC Brokerage. GCC monetary union had been slated to come into effect by 2010, but the deadline has been extended indefinitely.

"The UAE is very dedicated to achieving a GCC monetary union, which was evident in its decision of not de-pegging its dirham from the US dollar," the note states. Speculation about a possible currency de-pegging has driven the dirham up to a 17-year high and increased pressure on the peg.

And although the note acknowledges the success of the fixed exchange rate system for attracting foreign investors and "maintaining stability in the market," HC Brokerage advocates the need for a more independent monetary policy.

"The GCCs/UAE's path and that of the US has recently diverged, restraining monetary policy instruments from controlling escalating inflation in the UAE," it says. While also noting the official claim that skyrocketing house prices is the main reason for the high rate of inflation and that officials in Dubai are trying to find ways to tackle this problem, HC Brokerage states: "It is important to note that without free monetary instruments it is difficult to control inflation especially since last year's (2006) 15 per cent ceiling set on Dubai rent rates did not stop prices going up."

However, the report concedes: "Economic growth is growing at unprecedented rates and even with high inflation rate many foreign investors are still showing interest. The UAE attracts the largest amount of foreign direct investment (FDI) in the GCC. Officials are not resting on their laurels and are still working on facilitating and encouraging foreign investments in the country like foreign ownership in the UAE."

But recent figures show "that some other GCC economies seem to be catching eyes, with FDI increasing at higher rates than that of the UAE," comments the brokerage firm. "The GCC attracts only 3.9 per cent of the FDI invested in the world."

GCC Currency Forum 2008 (Dubai, U.A.E.)

GCC Currency Forum 2008 (Dubai, U.A.E.)
Arabian Banking & Finance is delighted to announce the launch of GCC Currency Forum 2008 on June 2008 at Madinat Jumeirah, Dubai, U.A.E.

An established and respected magazine, "Arabian Banking & Finance" provides news, data and in-depth analysis for the region’s finance professionals, while also illustrating the latest trends and product developments within the industry. Every issue highlights the key stories of the month from across the region, identifying the current ‘hot’ topics and predicting their market impact. "Arabian Banking & Finance' is truly a mirror of the regional Finance industry".

The current debate on the GCC’s unified currency has proverbially stirred the hornet's nest. What is the rationale for the proposed unified currency? What basket of currencies ought to be used as the reference peg? Will the peg be a narrow or wide band, the first causing the currency to be overvalued in times of oil trade surpluses, while the latter inviting speculative pressure? Would domestic borrowing, as a certain percentage of GDP, be a major factor in determining who strays in or out of the unified GCC currency, or would other factors such as population be taken into consideration? How would a unified currency restrict national monetary and fiscal policies? Kuwait's move to peg the Dinar to a basket of currencies in flagrant violation of the stated dollar peg, Oman's recalcitrant attitude coupled with an unequivocal statement that meeting the GCC monetary union criteria may have a negative impact on its development plan.

Sticking to entrenched official stated positions is not helpful in this matter, as individual countries might break ranks and catch other GCC members by surprise as Oman and Kuwait have done. Economic policies, and specifically monetary policies, should follow and react to current realities
Whether the GCC unified currency comes about by 2010 or later is not the main issue now. The actions of Oman and Kuwait have brought to the surface fundamental questions of policy implication that need to be addressed and openly debated.

Looking forward to meeting you at the GCC Currency Forum 2008 on June 2008.