No Magic Solution for Inflation, Says Al-Assaf
P.K. Abdul Ghafour, Arab News
Ibrahim Al-Assaf
JEDDAH — “There is no magic solution to the problem of inflation,” Finance Minister Dr. Ibrahim Al-Assaf said yesterday. He underscored the recent measures taken by the government, such as pay hike and subsidy for essential commodities to offset the impact of inflation.
The minister made this comment during a meeting with the 150-member consultative Shoura Council in Riyadh.
Osama Abu Gharara, deputy chairman of the council’s finance committee, said Al-Assaf had not spoken about revaluation of Saudi riyal against a declining US dollar.
However, Hamad Al-Sayari, governor of Saudi Arabian Monetary Agency (SAMA), who also attended the Shoura meeting, downplayed the effect of riyal-dollar peg on the Kingdom’s inflation that reached a record high of 6.5 percent last December.
“The riyal-dollar peg has not much effect on the problem of inflation. All exports of Saudi Arabia and other Gulf countries are in dollars and most developing countries use dollar in trade. Moreover, shipping and insurance expenditures are also calculated in dollars,” he explained.
Shoura Council Chairman Dr. Saleh Bin-Humaid said the council wanted an explanation from the minister on the purchasing power of Saudi riyal, future of the GCC currency union, oil prices, stock market situation and the measures taken by the state to contain inflation.
“Minister Al-Assaf told the meeting that the problem of inflation now exists in all countries. He also explained the economic policies taken by his ministry in this regard,” the Saudi Press Agency said quoting Ahmed Al-Yahya, assistant secretary-general of the Shoura.
Al-Assaf told the meeting that government’s direct subsidy for essential commodities such as flour, rice and baby milk in addition to indirect subsidies to many other products would help offset increasing cost of living caused by rising prices.
Speaking about the housing crunch and growing rents, the minister said the Real Estate Development Fund was providing citizens up to SR300,000 to build houses. “We know that this amount is not enough due to rising prices but people should find suitable means to complete their houses,” he added.
Al-Assaf denied allegations that his ministry was delaying payments to contractors. “We are now revising our relations with other government departments and developing electronic infrastructure to speed our work,” he added. He said Saudi Arabia’s taxation system was one of the best in the world.
On his part, Al-Sayari blamed growing inflation on the increasing demand for services. “The rate of inflation differs from one Saudi city to another,” he added.
He said the Ministry of Finance does not interfere in SAMA’s affairs. “SAMA is totally an independent institution.”
Al-Sayari said SAMA had given license to 10 foreign banks to operate in the Kingdom. He urged Saudi banks not to deduct more than one-third of salary from people who have taken loans and more than one-fourth of salary from pensioners. “If they do otherwise it would be a violation of the rule.”
Ihsan Bu-Hulaiga, chairman of the Shoura’s finance committee, said yesterday’s meeting with Al-Assaf examined the Kingdom’s monetary and foreign exchange policies. He objected to taking “hasty” actions in order to tackle inflation. “Instead, these issues should be dealt with by thoroughly examining all options that are available... not just foreign exchange reform,” he told Reuters.
Mohammed Al-Jasser, deputy governor of SAMA, said last month that it would take a “precipitous” decline in the dollar for Saudi Arabia to consider revaluing the riyal. A weaker riyal makes imports more expensive.
Kuwait has allowed its dinar to rise almost six percent since it broke ranks with its neighbors in May and severed the dinar’s link to the dollar to track a currency basket partly to help contain imported inflation.
Wednesday, February 20, 2008
Saudi Arabia in the grip of surging inflation
Saudi Arabia in the grip of surging inflation
By Nadim Kawach on Sunday, February 17 , 2008
A surge in food prices and rents have thrown Saudi Arabia into the throes of inflation after basking in relative stability for more than 20 years, prompting calls for currency revaluation and other measures.
Official figures showed inflation in the world’s oil powerhouse hit a record 4.1 per cent in 2007 mainly because of a surge in rents as well as the prices of food, beverages, fuel, water and other goods and services.
It was the highest inflation rate to hit the Kingdom since the end of the first oil boom in early 1980s, although it remains far lower than inflation levels in other neighbouring oil producers, mainly Qatar and the UAE.
Saudi Arabia, which controls nearly a quarter of the world’s recoverable oil resources, had suffered from its highest inflation rate of three per cent in 1991, but it was because of a sudden surge in prices due to the Gulf war aftermath. The situation last year, which extended a steady rise in inflation over the previous couple of years, was different.
“There has been a rise in rents over the past few years because of a steady increase in prices of most building materials and a strong demand due to an upsurge in the economy and investments, which attracted more expatriates,” said Ihsan bu Hulaiga, a well-known Saudi economist.
“Prices of some products have also increased mainly because of higher import costs since a large part of Saudi Arabia’s imports come from non-dollar countries and the US dollar has been steadily declining against other currencies.”
Figures by the Saudi Arabian Monetary Agency [central bank] showed there was a sharp rise in rents, food and beverage prices and other products in 2007.
Its cost of living index showed the prices of foodstuffs and beverages jumped seven per cent last year, while the prices of other goods and services soared by 5.3 per cent. Rents, house renovations, fuel and water prices shot up by 8.1 per cent and medical care by 4.9 per cent.
In contrast, the price of clothes and footwear declined by around one per cent, while home furniture, transport and telecommunications, recreation and education services remained almost unchanged.
Inflation was estimated at around 2.2 per cent in 2006 and only 0.7 per cent in 2005. It was almost flat in the previous three years, while it ranged between negative rate to one per cent in the previous two decades.
Sama’s figures showed inflation in 2007 picked up in the second half of the year, surging by nearly 5.9 per cent between June and December, after recording negative growth in some months in the first half.
Rising inflation rates have caused widespread concern in Saudi Arabia and other Gulf Arab states, most of which link their currencies to the weak US dollar. Such concerns have prompted calls for detaching the regional currencies or revaluing them, along with several other measures.
In recent statements, the IMF said Gulf states also need to trim spending and tighten money supply within stricter fiscal policy to curb inflation.
“Fiscal policy is the only effective instrument to control inflation in Gulf Co-operation Council states,” said Gene Leon, deputy chief of the GCC division.
According to the Kuwait-based Inter-Arab Investment Guarantee Corporation (IAIGC), a massive influx of expatriates to the GCC states due to accelerated economic growth is another major reason for the rise in inflation.
“Gulf states are witnessing another boom because of high oil prices and this has created a fresh influx of expatriates… this has put pressure on housing and other services and given rise to high prices,” it said in a study.
Like other Gulf states, Saudi Arabia has sharply boosted spending over the past few years following a surge in its petrodollar income that hit a record $180 billion (Dh660bn) and is projected to be even higher this year. The 2007 income is nearly five times the Kingdom’s 1998 income of only $36bn. Sama’s figures showed there has been a steady and rapid growth in the country’s money supply, which is normally associated with inflation.
Money supply M1, covering demand deposits and currency outsize banks, jumped to SR383bn (Dh380bn) at the end of 2007 from SR312bn at the end of 2006. Money supply M2, including M1 plus quasi-money, surged to SR666bn from SR538bn in the same period. Money supply M3, comprising M2 plus other quasi-monetary deposits, also swelled to a record SR789bn at the end of 2007 from SR660bn at the end of 2006.
By Nadim Kawach on Sunday, February 17 , 2008
A surge in food prices and rents have thrown Saudi Arabia into the throes of inflation after basking in relative stability for more than 20 years, prompting calls for currency revaluation and other measures.
Official figures showed inflation in the world’s oil powerhouse hit a record 4.1 per cent in 2007 mainly because of a surge in rents as well as the prices of food, beverages, fuel, water and other goods and services.
It was the highest inflation rate to hit the Kingdom since the end of the first oil boom in early 1980s, although it remains far lower than inflation levels in other neighbouring oil producers, mainly Qatar and the UAE.
Saudi Arabia, which controls nearly a quarter of the world’s recoverable oil resources, had suffered from its highest inflation rate of three per cent in 1991, but it was because of a sudden surge in prices due to the Gulf war aftermath. The situation last year, which extended a steady rise in inflation over the previous couple of years, was different.
“There has been a rise in rents over the past few years because of a steady increase in prices of most building materials and a strong demand due to an upsurge in the economy and investments, which attracted more expatriates,” said Ihsan bu Hulaiga, a well-known Saudi economist.
“Prices of some products have also increased mainly because of higher import costs since a large part of Saudi Arabia’s imports come from non-dollar countries and the US dollar has been steadily declining against other currencies.”
Figures by the Saudi Arabian Monetary Agency [central bank] showed there was a sharp rise in rents, food and beverage prices and other products in 2007.
Its cost of living index showed the prices of foodstuffs and beverages jumped seven per cent last year, while the prices of other goods and services soared by 5.3 per cent. Rents, house renovations, fuel and water prices shot up by 8.1 per cent and medical care by 4.9 per cent.
In contrast, the price of clothes and footwear declined by around one per cent, while home furniture, transport and telecommunications, recreation and education services remained almost unchanged.
Inflation was estimated at around 2.2 per cent in 2006 and only 0.7 per cent in 2005. It was almost flat in the previous three years, while it ranged between negative rate to one per cent in the previous two decades.
Sama’s figures showed inflation in 2007 picked up in the second half of the year, surging by nearly 5.9 per cent between June and December, after recording negative growth in some months in the first half.
Rising inflation rates have caused widespread concern in Saudi Arabia and other Gulf Arab states, most of which link their currencies to the weak US dollar. Such concerns have prompted calls for detaching the regional currencies or revaluing them, along with several other measures.
In recent statements, the IMF said Gulf states also need to trim spending and tighten money supply within stricter fiscal policy to curb inflation.
“Fiscal policy is the only effective instrument to control inflation in Gulf Co-operation Council states,” said Gene Leon, deputy chief of the GCC division.
According to the Kuwait-based Inter-Arab Investment Guarantee Corporation (IAIGC), a massive influx of expatriates to the GCC states due to accelerated economic growth is another major reason for the rise in inflation.
“Gulf states are witnessing another boom because of high oil prices and this has created a fresh influx of expatriates… this has put pressure on housing and other services and given rise to high prices,” it said in a study.
Like other Gulf states, Saudi Arabia has sharply boosted spending over the past few years following a surge in its petrodollar income that hit a record $180 billion (Dh660bn) and is projected to be even higher this year. The 2007 income is nearly five times the Kingdom’s 1998 income of only $36bn. Sama’s figures showed there has been a steady and rapid growth in the country’s money supply, which is normally associated with inflation.
Money supply M1, covering demand deposits and currency outsize banks, jumped to SR383bn (Dh380bn) at the end of 2007 from SR312bn at the end of 2006. Money supply M2, including M1 plus quasi-money, surged to SR666bn from SR538bn in the same period. Money supply M3, comprising M2 plus other quasi-monetary deposits, also swelled to a record SR789bn at the end of 2007 from SR660bn at the end of 2006.
Geopolitical risks to hit Abu Dhabi’s rating
Geopolitical risks to hit Abu Dhabi’s rating
By Matt Smith on Tuesday, February 12 , 2008
Geopolitical risks will prevent Abu Dhabi from increasing its credit rating in the immediate future, a senior analyst from global rating agency Standard & Poor’s (S&P) has warned.
Abu Dhabi is currently rated AA by S&P, which is two levels below the highest possible rating.
“We are already incorporating all Abu Dhabi’s strengths, particularly its fundamental wealth and asset positions,” said Farouk Soussa, Standard & Poor’s team leader of Middle East ratings.
“Abu Dhabi would have to address the current constraints to increase its rating and these are mainly geopolitical risks in the region, as well the relative lack of diversity in its economy.
“If pressures with Iran and tensions in Iraq ease, then we could see the ratings improving.” Soussa was speaking at the official opening of S&P’s Middle East headquarters at the Dubai International Finance Centre.
The US analysts currently provide ratings on 100 public and private sector entities across six Gulf countries, including the emirates of Abu Dhabi and Ras Al Khaimah. The latter was assigned an ‘A’ long-term and ‘A-1’ short-term foreign and local currency rating in January.
Global sukuk sales are likely to top $100 billion (Dh367bn) by the end of 2009, according to Jan Plantagie, S&P regional manager for the Middle East.
He said a “huge pipeline” of sukuks – Shariah-complaint bonds – will be launched either in the second half of this year or early in 2009.
International credit agencies such as S&P and Moody’s have been criticised for their role in the ongoing US sub-prime crisis, with many analysts saying they waited too long to cut the ratings of mortgage-backed bonds, and that they failed to adequately evaluate the risks inherent in sub-prime debt.
In response, S&P has announced 27 directives to increase transparency and improve information disclosure to investors.
S&P is part of a growing band of sceptics doubting whether a GCC monetary union can be achieved by the official 2010 deadline.
“This date looks very ambitious and we think it will be later than that. Kuwait has dropped its dollar peg, which makes it more complicated, while there are technical and political issues to be solved,” said Soussa.
Real estate has been a prime driver of Dubai’s economic boom, with property prices enjoying mega growth, but Soussa admits the bubble could yet burst.
He said: “A concern would be if the global slowdown results in a decrease in economic activity and so the number of expats relocating to the GCC, which is currently the main driver of demand, declines.
“But the construction boom of the GCC is very different from any experienced in the West.”
GCC sovereign wealth funds (SWFs) are refocusing their investments on their native region because opportunities in Western markets are diminishing. Soussa said: “Pursuing the best return means looking inside the GCC as well. The second reason is there’s now a greater capacity to absorb funds [in the GCC] and therefore more opportunities for development and so SWFs are looking inward as well.”
Soussa refused to comment on whether S&P will be rating Dubai in the near future. However, he praised the transparency of the region’s governments in supplying information on which to base its ratings, but admitted the quality of data was sometimes lacking.
Soussa added: “There’s room for improvement in terms of quality and breadth of information. This doesn’t affect our ability to complete our ratings, which are driven first by the government’s financial position and there is ample data on that.”
Net borrowing to reach $23bn
Net borrowing by Middle Eastern and African rated sovereigns may reach as much as $23 billion (Dh84.41bn) in 2008, a sharp increase from $7bn last year, according to Standard & Poor’s.
The hike is “due to a reduction in debt repayments and a rise in sovereign borrowing requirements”, S&P said in its fourth annual regional sovereign issuance survey. Despite the increase in borrowing, total new debt accounts for just 1.1 per cent of the combined GDP of the rated sovereigns.
The ratings agency “expects rated Middle Eastern and African sovereigns’ commercial medium and long-term borrowing to be $77.6bn in 2008, up from the $57bn borrowed in 2007. Of this, the vast majority, $54.2b, is required to refinance existing maturing debt, with the remaining $23.4bn reflecting new debt”.
By Matt Smith on Tuesday, February 12 , 2008
Geopolitical risks will prevent Abu Dhabi from increasing its credit rating in the immediate future, a senior analyst from global rating agency Standard & Poor’s (S&P) has warned.
Abu Dhabi is currently rated AA by S&P, which is two levels below the highest possible rating.
“We are already incorporating all Abu Dhabi’s strengths, particularly its fundamental wealth and asset positions,” said Farouk Soussa, Standard & Poor’s team leader of Middle East ratings.
“Abu Dhabi would have to address the current constraints to increase its rating and these are mainly geopolitical risks in the region, as well the relative lack of diversity in its economy.
“If pressures with Iran and tensions in Iraq ease, then we could see the ratings improving.” Soussa was speaking at the official opening of S&P’s Middle East headquarters at the Dubai International Finance Centre.
The US analysts currently provide ratings on 100 public and private sector entities across six Gulf countries, including the emirates of Abu Dhabi and Ras Al Khaimah. The latter was assigned an ‘A’ long-term and ‘A-1’ short-term foreign and local currency rating in January.
Global sukuk sales are likely to top $100 billion (Dh367bn) by the end of 2009, according to Jan Plantagie, S&P regional manager for the Middle East.
He said a “huge pipeline” of sukuks – Shariah-complaint bonds – will be launched either in the second half of this year or early in 2009.
International credit agencies such as S&P and Moody’s have been criticised for their role in the ongoing US sub-prime crisis, with many analysts saying they waited too long to cut the ratings of mortgage-backed bonds, and that they failed to adequately evaluate the risks inherent in sub-prime debt.
In response, S&P has announced 27 directives to increase transparency and improve information disclosure to investors.
S&P is part of a growing band of sceptics doubting whether a GCC monetary union can be achieved by the official 2010 deadline.
“This date looks very ambitious and we think it will be later than that. Kuwait has dropped its dollar peg, which makes it more complicated, while there are technical and political issues to be solved,” said Soussa.
Real estate has been a prime driver of Dubai’s economic boom, with property prices enjoying mega growth, but Soussa admits the bubble could yet burst.
He said: “A concern would be if the global slowdown results in a decrease in economic activity and so the number of expats relocating to the GCC, which is currently the main driver of demand, declines.
“But the construction boom of the GCC is very different from any experienced in the West.”
GCC sovereign wealth funds (SWFs) are refocusing their investments on their native region because opportunities in Western markets are diminishing. Soussa said: “Pursuing the best return means looking inside the GCC as well. The second reason is there’s now a greater capacity to absorb funds [in the GCC] and therefore more opportunities for development and so SWFs are looking inward as well.”
Soussa refused to comment on whether S&P will be rating Dubai in the near future. However, he praised the transparency of the region’s governments in supplying information on which to base its ratings, but admitted the quality of data was sometimes lacking.
Soussa added: “There’s room for improvement in terms of quality and breadth of information. This doesn’t affect our ability to complete our ratings, which are driven first by the government’s financial position and there is ample data on that.”
Net borrowing to reach $23bn
Net borrowing by Middle Eastern and African rated sovereigns may reach as much as $23 billion (Dh84.41bn) in 2008, a sharp increase from $7bn last year, according to Standard & Poor’s.
The hike is “due to a reduction in debt repayments and a rise in sovereign borrowing requirements”, S&P said in its fourth annual regional sovereign issuance survey. Despite the increase in borrowing, total new debt accounts for just 1.1 per cent of the combined GDP of the rated sovereigns.
The ratings agency “expects rated Middle Eastern and African sovereigns’ commercial medium and long-term borrowing to be $77.6bn in 2008, up from the $57bn borrowed in 2007. Of this, the vast majority, $54.2b, is required to refinance existing maturing debt, with the remaining $23.4bn reflecting new debt”.
Saudi to discuss riyal revaluation, combating inflation
Author: BI-ME staff
Source: BI-ME and agencies
Published: 17 February 2008
SAUDI ARABIA. The 150-member Shoura Council that advises the king, will discuss on Sunday the revaluation of the Saudi riyal against the US dollar, rising inflation and the GCC common currency.
Finance Minister Dr. Ibrahim Al-Assaf, Dr. Osama Abu Gharara, deputy chairman of the Financial Committee at the Shoura Council and Hamad Saud Al Sayyari, governor of the Saudi Arabian Monetary Agency will be present at the meeting.
“So far we have not seen any solution to control inflation,” Abu Gharara told Al-Eqtisadiah business daily. Inflation in the Kingdom surged to a record high of 6.5% last December.
Inflation is partly driven by a rise in global commodity prices and the weak US currency.
“We’ll also discuss the possibility of revaluing the riyal against the dollar in tune with its devaluation against other international currencies,” the Shoura member said. He emphasized the need for reviewing the riyal’s exchange rate with the falling American dollar.
"Revaluing the currency is a possible way to face inflation and it will be one of the solutions the council will present today," Abu Gharara was quoted as saying in the pan-Arab daily Asharq Al-Awsat.
The Shura Council can review draft legislation and make recommendations, but these are not binding on the government.
Saudi Arabia has been trying offset the impact of price rises on its 25 million people through measures including a plan announced last month to raise wages, welfare payments and subsidies.
Like most of its neighbours in the world's biggest oil-exporting region, Saudi Arabia's dollar peg means it is forced to track US monetary policy at a time when the Federal Reserve is cutting interest rates to help ward off recession.
Inflation has overtaken official borrowing costs in the largest Arab economy, where the central bank raised bank reserve requirements twice in two months to force lenders to keep more money in their vaults in a bid to slow down credit growth.
Saudi policymakers have repeatedly said the largest Arab economy would not sever its dollar link.
"I don't think that dropping the peg is a magical solution to curb inflation as there are neighbouring countries that changed the peg and their inflation reached record highs," Abu Gharara said, in reference to Kuwait.
The Saudi riyal hit a two-month high of 3.73 against the dollar last week.
Source: BI-ME and agencies
Published: 17 February 2008
SAUDI ARABIA. The 150-member Shoura Council that advises the king, will discuss on Sunday the revaluation of the Saudi riyal against the US dollar, rising inflation and the GCC common currency.
Finance Minister Dr. Ibrahim Al-Assaf, Dr. Osama Abu Gharara, deputy chairman of the Financial Committee at the Shoura Council and Hamad Saud Al Sayyari, governor of the Saudi Arabian Monetary Agency will be present at the meeting.
“So far we have not seen any solution to control inflation,” Abu Gharara told Al-Eqtisadiah business daily. Inflation in the Kingdom surged to a record high of 6.5% last December.
Inflation is partly driven by a rise in global commodity prices and the weak US currency.
“We’ll also discuss the possibility of revaluing the riyal against the dollar in tune with its devaluation against other international currencies,” the Shoura member said. He emphasized the need for reviewing the riyal’s exchange rate with the falling American dollar.
"Revaluing the currency is a possible way to face inflation and it will be one of the solutions the council will present today," Abu Gharara was quoted as saying in the pan-Arab daily Asharq Al-Awsat.
The Shura Council can review draft legislation and make recommendations, but these are not binding on the government.
Saudi Arabia has been trying offset the impact of price rises on its 25 million people through measures including a plan announced last month to raise wages, welfare payments and subsidies.
Like most of its neighbours in the world's biggest oil-exporting region, Saudi Arabia's dollar peg means it is forced to track US monetary policy at a time when the Federal Reserve is cutting interest rates to help ward off recession.
Inflation has overtaken official borrowing costs in the largest Arab economy, where the central bank raised bank reserve requirements twice in two months to force lenders to keep more money in their vaults in a bid to slow down credit growth.
Saudi policymakers have repeatedly said the largest Arab economy would not sever its dollar link.
"I don't think that dropping the peg is a magical solution to curb inflation as there are neighbouring countries that changed the peg and their inflation reached record highs," Abu Gharara said, in reference to Kuwait.
The Saudi riyal hit a two-month high of 3.73 against the dollar last week.
Sunday, February 17, 2008
Gulf States close in on currency revaluation
AME info, Sunday, February 17 - 2008 at 10:16
International banks in Dubai have slashed interest rates on dirham deposits to around one per cent, a sure sign that revaluation is not far off and that the banks do not want to be left holding dirham deposits. Today, the delayed Saudi Shura meeting of the king, finance minister and central bank governor is to discuss GCC-wide revaluation.
At the same time the Middle East Economic Digest reported that the UAE is about to split central bank responsibilities between a new financial services regulator and monetary policy.
Incumbent UAE Central Bank Governor Sultan bin Nasser Al Suwaidi could be replaced in a cabinet reshuffle on February 26; his present mandate expired on December 18.
This action would likely be a part of a wide ranging reform of UAE monetary policy. The GCC States, with the exception of Oman, committed themselves to a monetary union by 2010 at a meeting of heads of state last December.
Revaluation would be a logical step towards establishing a single GCC currency valued against a basket of global currencies and not just the US dollar, something like the successful Singapore dollar.
Controlling inflation
Meanwhile, a coordinated revaluation in advance of the single currency is also a logical move to head-off spiraling local inflation rates in the Gulf, and delivering a one-off relief to long suffering residents who are puzzled why the economic success of the region has resulted in this 'tax' on their salaries.
In order to make a real impact the Gulf States could choose a high, one-off revaluation of 10-15 per cent with the strong proviso that this was not going to be repeated before the 2010 common currency deadline.
From the perspective of the UAE there is a historical precedent to follow. Before independence in 1971 the dirham was a part of the sterling area, which then revalued and later moved to the fixed dollar peg.
Economists see the main benefit of an independent currency regime as being the ability to set interest rates in line with local economic conditions to avoid a boom-to-slump cycle. For the danger of having interest rates set by the US - whose economy is slumping and not booming - is very obvious.
Overheating
Overheating local economies with high inflation rates are unhealthy for long-term economic welfare, and action by the Gulf States will not be too late to make a difference.
The risk of not taking a decision is higher than taking the initiative and going for revaluation. US interest rates are set to go much lower this year and the situation can only deteriorate further.
Moreover, the recent rally in the US dollar due to the contraction of global liquidity amid the ongoing equity slump gives a golden opportunity to act on revaluation, without causing a negative impact on global dollar exchange rates.
Wise counsel and commonsense are likely to prevail in monetary policy, and the international banks in the UAE have sensed this and do not want to be left holding dirhams that might soon be converted into dollars at a new rate of exchange.
International banks in Dubai have slashed interest rates on dirham deposits to around one per cent, a sure sign that revaluation is not far off and that the banks do not want to be left holding dirham deposits. Today, the delayed Saudi Shura meeting of the king, finance minister and central bank governor is to discuss GCC-wide revaluation.
At the same time the Middle East Economic Digest reported that the UAE is about to split central bank responsibilities between a new financial services regulator and monetary policy.
Incumbent UAE Central Bank Governor Sultan bin Nasser Al Suwaidi could be replaced in a cabinet reshuffle on February 26; his present mandate expired on December 18.
This action would likely be a part of a wide ranging reform of UAE monetary policy. The GCC States, with the exception of Oman, committed themselves to a monetary union by 2010 at a meeting of heads of state last December.
Revaluation would be a logical step towards establishing a single GCC currency valued against a basket of global currencies and not just the US dollar, something like the successful Singapore dollar.
Controlling inflation
Meanwhile, a coordinated revaluation in advance of the single currency is also a logical move to head-off spiraling local inflation rates in the Gulf, and delivering a one-off relief to long suffering residents who are puzzled why the economic success of the region has resulted in this 'tax' on their salaries.
In order to make a real impact the Gulf States could choose a high, one-off revaluation of 10-15 per cent with the strong proviso that this was not going to be repeated before the 2010 common currency deadline.
From the perspective of the UAE there is a historical precedent to follow. Before independence in 1971 the dirham was a part of the sterling area, which then revalued and later moved to the fixed dollar peg.
Economists see the main benefit of an independent currency regime as being the ability to set interest rates in line with local economic conditions to avoid a boom-to-slump cycle. For the danger of having interest rates set by the US - whose economy is slumping and not booming - is very obvious.
Overheating
Overheating local economies with high inflation rates are unhealthy for long-term economic welfare, and action by the Gulf States will not be too late to make a difference.
The risk of not taking a decision is higher than taking the initiative and going for revaluation. US interest rates are set to go much lower this year and the situation can only deteriorate further.
Moreover, the recent rally in the US dollar due to the contraction of global liquidity amid the ongoing equity slump gives a golden opportunity to act on revaluation, without causing a negative impact on global dollar exchange rates.
Wise counsel and commonsense are likely to prevail in monetary policy, and the international banks in the UAE have sensed this and do not want to be left holding dirhams that might soon be converted into dollars at a new rate of exchange.
Monday, February 11, 2008
Common Market More Important than Common Currency
11 December, 2007, Gulf Research Center
Eckart Woertz
Program Manager, Economics
With Kuwait’s decision to peg its currency to a currency basket instead of the dollar exclusively and the withdrawal of Oman, the planned GCC currency union saw two major setbacks this year. Still, its scheduled implementation by 2010 was reconfirmed at the GCC summit in December 2007, despite widespread doubts among experts who deem this unrealistic under present circumstances. The planned GCC common market has received less attention in the media, although it is arguably more important than the proposed currency union. A currency union by itself does not increase trade numbers if it cannot build on an already existing common market, and monetary policies of the GCC countries already show some synchronization anyway – provided common currency pegs persist, be it to the US dollar or some kind of currency basket.
The launch of a GCC common market by January 1, 2008 will mark an important step in GCC economic integration. It will move beyond the free movement of goods and services that has been agreed upon in the GCC customs union to include labor and capital flows as well. To this end, various markets have to be opened up and regulations harmonized, ranging from labor laws to pension schemes and social security entitlements. The list in article 3 of the GCC Unified Economic Agreement is long and includes access to universities and other education, as well as the right to buy and sell property, and to invest without restrictions.
On the eve of the start of the GCC customs union in January 2003, a timeline for the GCC common market was agreed upon: By the end of 2007, the GCC should harmonize its legal requirements and legal codes and the member states should enable them on the respective national level. The necessary third step would then be the actual implementation by the respective administrative institutions and their bureaucracies. Although the GCC has already achieved consensus on a vast number of laws, their actual implementation on the national levels still lags behind and detailed specifications and unified regulatory frameworks are absent in many cases. Cars are one of the few examples where such detailed specification has been achieved, but otherwise all too often the free flow of goods is hampered by red tape and confusion about applicable procedures. In this context, an episode that comes to mind is the UAE customs’ refusal to let in Saudi dates in retaliation for an earlier Saudi refusal to allow re-export goods from the UAE. Thus, the GCC customs union as a necessary precondition of a common market has not been fully implemented in 2007 as envisaged, and Saudi Arabia has asked for extra time of one year.
The implementation of the common market will go beyond the realm of goods and services and will complicate things further. It would not be possible to keep laws of workforce nationalization (Saudization, Emiratization etc.) in their current form and labor laws would need to be applied to all GCC nationals equally. The same is true for the sponsorship systems, and the respective stock markets would need to offer equal access for all GCC citizens. But so far considerable restrictions persist. For example, the Haj tourism industry is, and most likely will remain, a closed Saudi market, and all GCC stock markets, except for Bahrain, have limited the percentage of shares that other GCC nationals can hold in a publicly listed company. Despite some liberalization like Saudi Arabia opening up its banking sector to other GCC investors, this state of limbo is going to persist for some time: “As far as we are concerned there is nothing changing as from January 1, 2008,” announced the chairman of Dubai Financial Market, Eisa Al Kazim. No doubt, next year will mark the beginning of a long process, and not the start of a full fledged common market.
A currency union by itself does not increase trade numbers if it cannot build on an already existing common market, and monetary policies of the GCC countries already show some synchronization anyway - provided common currency pegs persist .
Provided consensus on the GCC level will have been achieved in respect to laws and regulations and provided the national governments will have implemented these laws in the respective countries, the ultimate litmus test for the common market will come in the real world of institutions and bureaucracies as they need to guarantee the accurate realization of the proposed policies. The requirements for training can be imagined. More importantly, public awareness about the possibilities of the common market would need to increase. Besides specific media campaigns, the website of the GCC and other information outlets could be improved, and cooperation with non-governmental bodies like chambers of commerce strengthened. Only with well-oiled feedback loops, will the GCC be able to monitor the grade of actual implementation. It will, of course, also require the capability to enforce it if need be. Here, a major empowerment of centralized GCC institutions is warranted. It is not enough to meet once or twice a year to decide important issues, the establishment of a common market needs day-to-day decision making by administrations with corresponding institutional capabilities. The EU has the European Commission, the Council of the EU, the European Parliament and the court of justice to deal with such matters; in the GCC, no such institution exists thus far.
Another important caveat has to be given in comparison to the EU, which is often quoted as a role model for the nascent GCC common market. GCC economies are not as diverse as the industrialized countries of Europe, which have had a longer history of development and integration. Before establishing a common market, about two thirds of all EU trade was conducted within the union itself, while GCC countries are still heavily oil dependent, with an overall export share of up to 90 percent depending on the country and intra-GCC trade comprising only about 7 percent of total GCC trade. Thus, besides liberalization, increased trade will require further diversification of the GCC economies in the first place.
The large numbers of expatriate workers in the GCC are an important factor as well. Even in population-rich Saudi Arabia, they constitute 65 percent of the overall labor force with figures in other countries much higher; for example, expatriates constitute over 80 percent of the UAE population. Especially in private sector employment, the dominance of expatriates is nearly absolute while employment of GCC nationals is still concentrated in the public sector, with a tendency towards lifetime adherence to one institution and traditionally low labor mobility. This means that labor mobility in the GCC will not increase very much in the wake of a successful establishment of a common market, simply because its regulation will only apply to a minority of the GCC labor force.
Thus, the issue of expatriates, and possibly a new social contract with them, would need to be part and parcel of the moves for successful establishment of a GCC common market, besides the three steps mentioned above: Once the necessary laws and regulatory frameworks are devised at the GCC level, and once they have been enabled at the national level and their proper implementation supervised, the common market will indeed make more of a difference in the lives of GCC residents than a possible GCC currency. Necessary prerequisites for such successful implementation will include empowered, centralized GCC institutions and increased public awareness about the common market and the entitlements that come with it.
http://www.grc.ae/?frm_action=view_newsletter_web&sec_code=grccommentary&frm_module=contents&show_web_list_link=1&int_content_id=42922&PHPSESSID=66090205577764f043b5dd22a32e2e33
Eckart Woertz
Program Manager, Economics
With Kuwait’s decision to peg its currency to a currency basket instead of the dollar exclusively and the withdrawal of Oman, the planned GCC currency union saw two major setbacks this year. Still, its scheduled implementation by 2010 was reconfirmed at the GCC summit in December 2007, despite widespread doubts among experts who deem this unrealistic under present circumstances. The planned GCC common market has received less attention in the media, although it is arguably more important than the proposed currency union. A currency union by itself does not increase trade numbers if it cannot build on an already existing common market, and monetary policies of the GCC countries already show some synchronization anyway – provided common currency pegs persist, be it to the US dollar or some kind of currency basket.
The launch of a GCC common market by January 1, 2008 will mark an important step in GCC economic integration. It will move beyond the free movement of goods and services that has been agreed upon in the GCC customs union to include labor and capital flows as well. To this end, various markets have to be opened up and regulations harmonized, ranging from labor laws to pension schemes and social security entitlements. The list in article 3 of the GCC Unified Economic Agreement is long and includes access to universities and other education, as well as the right to buy and sell property, and to invest without restrictions.
On the eve of the start of the GCC customs union in January 2003, a timeline for the GCC common market was agreed upon: By the end of 2007, the GCC should harmonize its legal requirements and legal codes and the member states should enable them on the respective national level. The necessary third step would then be the actual implementation by the respective administrative institutions and their bureaucracies. Although the GCC has already achieved consensus on a vast number of laws, their actual implementation on the national levels still lags behind and detailed specifications and unified regulatory frameworks are absent in many cases. Cars are one of the few examples where such detailed specification has been achieved, but otherwise all too often the free flow of goods is hampered by red tape and confusion about applicable procedures. In this context, an episode that comes to mind is the UAE customs’ refusal to let in Saudi dates in retaliation for an earlier Saudi refusal to allow re-export goods from the UAE. Thus, the GCC customs union as a necessary precondition of a common market has not been fully implemented in 2007 as envisaged, and Saudi Arabia has asked for extra time of one year.
The implementation of the common market will go beyond the realm of goods and services and will complicate things further. It would not be possible to keep laws of workforce nationalization (Saudization, Emiratization etc.) in their current form and labor laws would need to be applied to all GCC nationals equally. The same is true for the sponsorship systems, and the respective stock markets would need to offer equal access for all GCC citizens. But so far considerable restrictions persist. For example, the Haj tourism industry is, and most likely will remain, a closed Saudi market, and all GCC stock markets, except for Bahrain, have limited the percentage of shares that other GCC nationals can hold in a publicly listed company. Despite some liberalization like Saudi Arabia opening up its banking sector to other GCC investors, this state of limbo is going to persist for some time: “As far as we are concerned there is nothing changing as from January 1, 2008,” announced the chairman of Dubai Financial Market, Eisa Al Kazim. No doubt, next year will mark the beginning of a long process, and not the start of a full fledged common market.
A currency union by itself does not increase trade numbers if it cannot build on an already existing common market, and monetary policies of the GCC countries already show some synchronization anyway - provided common currency pegs persist .
Provided consensus on the GCC level will have been achieved in respect to laws and regulations and provided the national governments will have implemented these laws in the respective countries, the ultimate litmus test for the common market will come in the real world of institutions and bureaucracies as they need to guarantee the accurate realization of the proposed policies. The requirements for training can be imagined. More importantly, public awareness about the possibilities of the common market would need to increase. Besides specific media campaigns, the website of the GCC and other information outlets could be improved, and cooperation with non-governmental bodies like chambers of commerce strengthened. Only with well-oiled feedback loops, will the GCC be able to monitor the grade of actual implementation. It will, of course, also require the capability to enforce it if need be. Here, a major empowerment of centralized GCC institutions is warranted. It is not enough to meet once or twice a year to decide important issues, the establishment of a common market needs day-to-day decision making by administrations with corresponding institutional capabilities. The EU has the European Commission, the Council of the EU, the European Parliament and the court of justice to deal with such matters; in the GCC, no such institution exists thus far.
Another important caveat has to be given in comparison to the EU, which is often quoted as a role model for the nascent GCC common market. GCC economies are not as diverse as the industrialized countries of Europe, which have had a longer history of development and integration. Before establishing a common market, about two thirds of all EU trade was conducted within the union itself, while GCC countries are still heavily oil dependent, with an overall export share of up to 90 percent depending on the country and intra-GCC trade comprising only about 7 percent of total GCC trade. Thus, besides liberalization, increased trade will require further diversification of the GCC economies in the first place.
The large numbers of expatriate workers in the GCC are an important factor as well. Even in population-rich Saudi Arabia, they constitute 65 percent of the overall labor force with figures in other countries much higher; for example, expatriates constitute over 80 percent of the UAE population. Especially in private sector employment, the dominance of expatriates is nearly absolute while employment of GCC nationals is still concentrated in the public sector, with a tendency towards lifetime adherence to one institution and traditionally low labor mobility. This means that labor mobility in the GCC will not increase very much in the wake of a successful establishment of a common market, simply because its regulation will only apply to a minority of the GCC labor force.
Thus, the issue of expatriates, and possibly a new social contract with them, would need to be part and parcel of the moves for successful establishment of a GCC common market, besides the three steps mentioned above: Once the necessary laws and regulatory frameworks are devised at the GCC level, and once they have been enabled at the national level and their proper implementation supervised, the common market will indeed make more of a difference in the lives of GCC residents than a possible GCC currency. Necessary prerequisites for such successful implementation will include empowered, centralized GCC institutions and increased public awareness about the common market and the entitlements that come with it.
http://www.grc.ae/?frm_action=view_newsletter_web&sec_code=grccommentary&frm_module=contents&show_web_list_link=1&int_content_id=42922&PHPSESSID=66090205577764f043b5dd22a32e2e33
MU delay seen to prompt one-off GCC revaluations
BY ISSAC JOHN (Deputy Business Editor)
11 February 2008
DUBAI — A longer delay in GCC monetary union (MU) will prompt some member countries to contemplate one-off revaluations, while still maintaining the dollar pegs, leading currency analysts warned.
Since the planned monetary union of the GCC in 2010 looks to be an increasingly ambitious goal, there is a rising risk that it will either be delayed or that a few, but not all, of the six GCC member countries will start this union on time, and others will join when they are ready, said Stephen Jen, an analyst at Morgan Stanley, a global financial services firm.
"Modest step revaluations, while retaining dollar pegs, are indeed a possibility, particularly if the Fed continues to ease while oil prices don’t correct significantly. The probability rises the longer the monetary union is postponed," he said.
"A postponement of the launch of the monetary union could complicate the exchange rate policies of the GCC countries. Specifically, the longer the delay, the more tempting/likely it will be for some small open economies in the GCC to contemplate one-off revaluations," Jen said in a report co-authored with Luca Bindelli and Charles St-Arnaud.
Stressing the need for an independent monetary policy with a managed float exchange rate regime for the GCC members, they argued that it would, in theory, be better for the GCC to introduce major changes to their exchange rate and monetary regime after they have introduced a monetary union.
"At the GCC Heads of State Summit in December 2007, the issue of whether to postpone the establishment of the monetary union was tabled for discussion, but no verdict was rendered. Our best guess at this point is that the project will either have to be postponed to 2015 or that only a small subset of the six GCC members will form the initial common currency area, with the others joining in the future, when they are ready. What this means is that the individual countries may have more leeway in devising their own policy paths in the meantime, i.e., it will no longer be essential that the GCC members move in sync and in a coordinated manner," they pointed out.
According to the analysts, the total GDP of the six GCC countries is rather modest. At $790 billion in 2007, the GCC is a little more than half the size of Canada. The total population of the GCC is 36 million, with Saudi Arabia accounting for 24 million of this total.
"While the GCC members have more natural (economic, social, language, historical and cultural) commonalities than the countries in the Euroland, there is relatively less convergence on economic measures." The main concern, they pointed out, is different endowments of natural resources. Second, fiscal convergence will be difficult. With exports of energy being so dominant, swings in oil prices have had, and will continue to have, a major impact on the fiscal positions of these countries.
There is also no more monetary convergence. "The GCC members now need to think hard about their price competitiveness as they enter the monetary union. The longer it takes to form a monetary union, the wider the window for policy interventions to adjust these glide paths."
Another concern is low quality of macro data and a lack of transparency. For example, CPI inflation is available with a six-month lag in Kuwait, while Bahrain and UAE only have annual numbers. In addition, the measures themselves are likely to be understatements of the reality.
Low degree of labour mobility within the region for the expatriate workers is another concern. Though there is effective free movement of the nationals within the GCC, mobility is much lower for the expatriate workers.
"One of the key requirements of an optimal currency area is free mobility of capital and labour, and the GCC has not satisfied this requirement yet," they pointed out.
11 February 2008
DUBAI — A longer delay in GCC monetary union (MU) will prompt some member countries to contemplate one-off revaluations, while still maintaining the dollar pegs, leading currency analysts warned.
Since the planned monetary union of the GCC in 2010 looks to be an increasingly ambitious goal, there is a rising risk that it will either be delayed or that a few, but not all, of the six GCC member countries will start this union on time, and others will join when they are ready, said Stephen Jen, an analyst at Morgan Stanley, a global financial services firm.
"Modest step revaluations, while retaining dollar pegs, are indeed a possibility, particularly if the Fed continues to ease while oil prices don’t correct significantly. The probability rises the longer the monetary union is postponed," he said.
"A postponement of the launch of the monetary union could complicate the exchange rate policies of the GCC countries. Specifically, the longer the delay, the more tempting/likely it will be for some small open economies in the GCC to contemplate one-off revaluations," Jen said in a report co-authored with Luca Bindelli and Charles St-Arnaud.
Stressing the need for an independent monetary policy with a managed float exchange rate regime for the GCC members, they argued that it would, in theory, be better for the GCC to introduce major changes to their exchange rate and monetary regime after they have introduced a monetary union.
"At the GCC Heads of State Summit in December 2007, the issue of whether to postpone the establishment of the monetary union was tabled for discussion, but no verdict was rendered. Our best guess at this point is that the project will either have to be postponed to 2015 or that only a small subset of the six GCC members will form the initial common currency area, with the others joining in the future, when they are ready. What this means is that the individual countries may have more leeway in devising their own policy paths in the meantime, i.e., it will no longer be essential that the GCC members move in sync and in a coordinated manner," they pointed out.
According to the analysts, the total GDP of the six GCC countries is rather modest. At $790 billion in 2007, the GCC is a little more than half the size of Canada. The total population of the GCC is 36 million, with Saudi Arabia accounting for 24 million of this total.
"While the GCC members have more natural (economic, social, language, historical and cultural) commonalities than the countries in the Euroland, there is relatively less convergence on economic measures." The main concern, they pointed out, is different endowments of natural resources. Second, fiscal convergence will be difficult. With exports of energy being so dominant, swings in oil prices have had, and will continue to have, a major impact on the fiscal positions of these countries.
There is also no more monetary convergence. "The GCC members now need to think hard about their price competitiveness as they enter the monetary union. The longer it takes to form a monetary union, the wider the window for policy interventions to adjust these glide paths."
Another concern is low quality of macro data and a lack of transparency. For example, CPI inflation is available with a six-month lag in Kuwait, while Bahrain and UAE only have annual numbers. In addition, the measures themselves are likely to be understatements of the reality.
Low degree of labour mobility within the region for the expatriate workers is another concern. Though there is effective free movement of the nationals within the GCC, mobility is much lower for the expatriate workers.
"One of the key requirements of an optimal currency area is free mobility of capital and labour, and the GCC has not satisfied this requirement yet," they pointed out.
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