Revaluation on the agenda for GCC states

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On the way out? The GCC Central Bank governors are rumoured to be considering ditching the dollar peg.

Talks over the future of the GCC currencies’ US dollar peg are gaining fresh momentum in anticipation of this month’s GCC Central Bank governors meeting, with the council rumoured to be considering revaluating the Gulf currencies and eventually ditching the peg altogether.

UAE Central Bank governor Sultan bin Nasser Al Suweidi told reporters yesterday that the UAE won't revalue its currency 'unilaterally'.

"We will go with what is best for the GCC," he said. "We will discuss this and other issues such as the inclusion of Oman in the GCC monetary union at the meeting."

Experts claim that the Saudi riyal is undervalued by 25-30% due to the continuous weakening of the US dollar, making imports from Asia and Europe increasingly expensive.

Nahed Taher, Founder and CEO of the Gulf One Investment Bank, told Arabian Business earlier this year that “Gulf nations lose about one third of their purchase power due to the tight dollar peg. Our trading partners for both imports and exports are increasing in Asia. Another 35% of our imports come from Europe.”

Deutsche Bank’s recent “GCC macro outlook” report confirms that the UAE dirham and Bahrain dinar would need to be revalued by between 10%-15%, while the Saudi riyal and the Omani riyal are undervalued by 25%-30%.

The report says that currency revaluation would not affect the Gulf’s soaring account surpluses since the nations’ prime exports — hydrocarbons — are priced in US dollars.

Zahed Chowdhury, Head of Research, ME, Deutsche Bank argues that an immediate effect of the revaluation would be the reduction of consumer price inflation: “The Gulf economies today are much less dollar dominated than, let’s say, 30 years ago. Most imports are not dollar priced, so once the currencies get revalued those imports, and consequently goods, will become cheaper. Real estate owners would also see their properties appreciate in value, and expats that earn their money in the local currencies would have more value to their salary.”

Economists have argued for months that the fixed peg causes macro-economic trouble for the GCC states, but so far the governors have been reluctant to change. The Middle Eastern oil exporters have, in the meantime, generated a US$250bn US trade deficit — even higher than the USA’s US$200bn trade deficit with China. Chowdhury, however, does not believe that it was US pressure that finally moved the governors. “I believe that the GCC central banks would have acted earlier, but they still need to resolve some outstanding points,” he said.

Kuwait is the only country that allows its dinar to trade within a 3.5% band, and revaluated its currency last May for the first time in 17 months. Kuwait pays for half its imports in yen and euro.

Chowdhury also mentioned that it would make more sense to peg to a basket of currencies, or have them free-floating, “but as a start the basket would be the most reasonable thing to do”. He did, however, say that even though the governors might decide to revalue their currencies, they are not likely to ditch the peg completely before the GCC monetary union launches. The Deutsche Bank report, though, claims that the proposed monetary unions in 2010 will most likely be delayed. Oman has already declared that it will join at a later stage, but it seems that the project may be postponed.

“Time is running out, and it seems the 2010 deadline is unrealistic,” he said, adding that the reason for the delay is political, including issues such as where the central banks and governors should be located.

“The mainstreaming of the GCC currencies should be easy regarding the economic fundamentals, but these topics drag the process along,” he added.

It is difficult to predict how long the project will be delayed for, he said, but once in place the common currency will have obvious benefits, such as reduced inflation and increased monetary control.

Taher insisted that the different economic agenda of the Gulf states would be the main obstacle to monetary union. She argued that the UAE and Qatar have diversified economies, as opposed to Kuwait and Saudi Arabia, which are still very much dominated by oil exports. However, Chowdhury dismissed these claims. “All GCC economies are healthy, and they are doing well. Even if the economies are slightly different it should not be a problem to form a monetary union. Even if Dubai is different to Kuwait, the UAE and Kuwait are rather similar,” he said.

The UAE Central Bank refused to comment last week.

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