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Tue 2 Mar 2004 04:00 AM

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Up, up and away

The Dollar is plunging and the Euro, Yen are Sterling are rocketing. Arabian Business looks at the impact on the Gulf.

|~||~||~|If you’ve been locked up in a dark room with no television, newspaper or an enthusiastic economist to talk to, then you’ll probably have missed the big business news of the last two months. One of the old men of the currency market, the almost 200 year old Dollar, is on a slippery slide against the young Euro, the venerable Sterling and the steady Yen. However, when it comes down to the nitty gritty, how much does the dollar’s decline really impact on your day to day lives?

The brutal reality is that it has a serious impact. Take a look at the 20,000 or so British expatriates in the United Arab Emirates.

Just over a year ago, heading to the sunny shores of Dubai meant a tax free salary, comfortable life and higher living standards than you could expect earning your keep in London.

In the space of 12 months, all that has changed. Simply put, wages are not worth as much and expatriates are finding it less rewarding to repatriate money to pay off loans, mortgages or build up retirement funds.

What recently was Dhs5.2 to the British pound is now Dhs6.8. Companies may be considering, as a way of countering this shortfall, a nominal increase in salaries, but tax free simply doesn't mean the same any more. Henry Azzam, CEO of Jordinvest, last month took it one step further.

“If there’s somebody who’s working here, who is British and thinks he can make money, he’s mistaken. In a year he has already lost 30% of his income. The taxes you were paying in the UK, you are paying here through the exchange rate differences, so you’re better off going back home.”

Having said that, the planes leaving Dubai aren’t packed with worried expatriates. If anything, Dubai for one, as an economy, has seen some positive out of this dollar decline.

The very same planes taking us to cooler climes are packed with millions of Europeans coming in the other direction for a holiday in the sun. While their European expatriate cousins are sweating on their salaries here, the holidaymakers are cashing in on a strong Euro and Sterling.

“This is the flip side of the coin,” says Suresh Kumar, general manager, Emirates Bank, Asset Management and Markets. “The hard currency visitors find their currency goes further here. Also, people [from the region] stay within the region or travel to the Far East, for example.”

The Gulf in many ways is a paradox. On the one hand, its prime export/import market is Europe and the Far East. Excluding military equipment, the two regions together export more to the Gulf than the United States. Yet, conversely, the economies are linked to the dollar. Gulf currencies are pegged to the dollar, while income from its main financial resource, oil, is calculated in the greenback.

As a result, Dirhams, Riyals and Dinars are buying fewer Euros and fewer Yens. All that means one thing. Be it German cars, French cheese or Japanese cameras, the cost of these products will increase and that cost has to be absorbed by someone.

“Imports from countries [whose currencies] appreciated against the dollar are now more expensive, so if you’re buying from these [nations], you have to pay a little bit more,” says Daniel Hanna, Middle East economist at Standard Chartered Bank. “It’s been more visible in the car market, simply because you only buy a car once in a while, so when you do see a move in prices, it tends to be quite noticeable.”

Just to highlight that parallel, auto-industry experts are suggesting the price of German and European cars in particular are now cheaper in the US than in their countries of origin across the Atlantic. The Mercedes E320, for example costs $5,000 less than a year ago, while a Rolls Royce Phantom Menace offers an $85,000 saving.

On the surface, raising the price of cars sold in the region would make sense to compensate for currency fluctuations. However, European and Asian exporters are thinking twice about jumping into a price hike, as this plays into the hands of American car manufacturers, whose products are cheaper.

“What seems to be happening is that exporters are absorbing the currency move in profit margins in order to try and maintain volume,” says Mark Austin, global head for foreign exchange, HSBC. “I wouldn’t expect imported German cars to rise as much as you might expect given the strength of the euro, because in order to maintain sales, the exporters from Europe are seemingly willing to keep their prices relatively stable, so the impact is reduced.”

Although BMW and Mercedes were unavailable for comment, both Japanese Nissan and French Peugeot agreed this was the most suitable strategy to follow.

In Nissan’s case, it has suffered from an almost 13% strengthening of the Yen over the dollar in the last year. From January to September 2003, it averaged 120 to the dollar, gradually falling to 110 in the fourth quarter and now hovering around the 105 mark.

According to its local distributor in Dubai, sales for 2003 did not fall, partly due to contracts signed several months in advance to ensure the stock inventory kept its profitability. However, once that stock came to an end, the dealer began to feel a pinch. Michel I. Ayat, general manager, Arabian Automobiles, Nissan, says his Japanese partner did not want to pass the price burden to the customer.

“We made a deal with Nissan, whereby we absorbed a third, [they] absorbed a third, and we passed around a 4-5% increase to customers, but offering them benefits in terms of reducing price maintenance costs,” says Ayat.

That sentiment was echoed by Peugeot’s regional general manager, Jamal Sahl, who confirmed the importance of staying competitive by cutting profit margins through invoicing its regional dealers in dollars rather than euros. He claims Peugeot, which is desperate to expand its regional market share, will have to incur short-term losses, if it is to succeed in the long run.

“If I increased [the price] of our cars even by 25%, then it would take them completely out of the market,” he says. The car industry is a good benchmark to judge whether the region as a whole will suffer from a comprehensive price increase in goods from non-dollar orientated economies. In this case, it seems the impact will be minimal if the dollar’s slide remains a short-term phenomenon.

In many ways, the dollar’s decline impacts the Gulf and the US similarly. Foreigners who deal in non-dollar related currencies have more money to buy the greenback, meaning that goods from the US or in this case the Gulf become relatively cheap and sales volumes go up. This increases competitiveness, particularly as the Gulf looks to diversify its economies away from oil. Likewise, trade with the United States, South-East Asia and local markets is also set to rise, as a cost friendly alternative to traditional trading partners in Europe.

However, according to Emirates Bank’s Kumar, this is not as significant an issue for the Gulf, as trade throughout the GCC still only accounts for about 20% of regional GDP. Additionally, Maria Khoury, head of research at Atlas Investment Group, a Jordanian investment bank, believes the region will eventually look back to the European and Japanese markets.

“I don’t want to say the region is turning a blind eye to Europe, as it was the hand that fed them until recently, but a lot are looking towards the US,” she says.

“Initially there will be a boom as the US opens its doors to the region. However, ultimately, Europe is still closer and we know their markets better.”

Of course, the GCC would not be the place it is without the black stuff. Its wealth comes from this and with the price of oil calculated in the greenback, OPEC recently outlined its concerns. “Producers are concerned about the weakness of the price of the dollar and the current price of oil is not due to a shortage of supply,” said Qatari oil minister Abdullah bin Hamad Al Attiyah.

However, charging for oil in Euros looks unlikely. “Changing from one currency to another is a difficult decision to take within OPEC,” he said.

That led a few days later to OPEC deciding to cut oil production by 2.5 million barrels per day (bpd) from April 1, 2004 to keep prices at the upper end of $24-28 bpd mark. The signs from OPEC indicate a further 700,000 barrels could be trimmed, if prices fall below $24.

Beshr Bakheet, managing partner, Bakheet Financial Advisors in Riyadh, puts it down to simple laws of gravity. “We now have to pay more[for European imports] because the dollar is worth less, so OPEC nations are saying we need to get more to compensate for the drop in value, so we need to increase the price to a higher level.” This very factor protects the region from the effects of the dollar’s decline.

“If you look at the oil price in euros, it’s around 24, which is still relatively high to the normal trend, but it doesn’t look as high as it does in dollars,” says Standard Chartered’s Hanna. “Oil adjusts automatically to the dollar’s decline, so we’re sort of insulated within the Gulf on the oil export side of things through this mechanism.”

If the decline of the dollar were to continue for the next few years, it could hypothetically become a problem, particularly if oil prices were not raised to compensate for the loss. However, the fact that oil is linked to the dollar does isolate the Middle East from the impact felt in Europe, where the rising Euro makes its exports more expensive.

Ultimately, it does come down to the United States. As long as America is in the midst of a presidential election campaign, it’s unlikely the chairman of the US Federal Reserve, Alan Greenspan, will rock the US economic feelgood factor by raising interest rates. Until he does, however, the region’s European expatriate community will continue to feel the pinch.||**||

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