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
Tuesday, May 27, 2008
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."
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."
Monday, May 5, 2008
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.
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.
Monday, April 28, 2008
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.
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.
Saturday, April 26, 2008
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."
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."
Thursday, April 10, 2008
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.
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.
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