19 August 2008
Oil producers in the Gulf are unlikely to revalue their currencies against the US dollar before they launch their landmark monetary union andecide on the common currency unit for that scheme, experts said yesterday.
Although the dollar's recovery over the past few weeks could weaken speculation about an appreciation of the GCC currencies, economists said the increase would not affect any revaluation plans.
"An appreciation of the GCC currencies has nothing to do now with the recovery or the decline in the US dollar as such plans have become closely linked to the common currency under discussion," Mohammed Al Asumi, a Gulf economist, told Emirates Business.
"Any currency changes in the GCC are now associated more with the monetary policy than the dollar movements. I don't expect any major changes in the existing currencies before the creation of the monetary union. As for the common currency, my feeling is that it will likely be pegged to a basket of currencies, in which the US dollar will be the main component."
Speculation escalated in 2007 about a GCC decision to appreciate national currencies against the US dollar following a sharp decline in its value and a surge in domestic inflation, for which the weak dollar has been blamed as one of the main factors along with soaring rents and food prices.
GCC states, expect Kuwait which quit the dollar for a basket of currencies last year, have sent conflicting signals on whether they would revalue their currencies or maintain the dollar peg. But speculation remained strong through the year, stoked by acceleration in inflation and further falls in the dollar.
While Saudi Arabia's Central Bank (Sama) has more than once hinted at a revaluation, the UAE has repeatedly indicated there are no such plans on the grounds the drop in the dollar is only temporary.
"There is no intention for the time being to unpeg our currencies from the US dollar because if you look at currencies worldwide, you will find that all of them keep fluctuating, rising some times and declining later. So the decline in the dollar is a temporary phenomenon and we should not build long-term monetary decisions on short-term issues. In other words, we cannot look for long-term solutions for short-term problems," UAE Central Bank Governor Sultan bin Nassir Al Suweidi, said recently.
"The dollar was steadily rising and with it, the GCC currencies were rising. It was a period of nearly 10 years while it has weakened for nearly three and a half years now. If we compare this period to the previous period, we find that it is a relatively short period. Our hope is that the dollar will rise again."
Suweidi said a decision by GCC states, which control 45 per cent of the world's oil, to detach their currencies from the dollar is not easy.
"Leaving the dollar is a very complicated issue and is even more complicated that you can imagine..It is not a simple matter that 'let's peg today and let's unpeg tomorrow'...this issue requires deep and long studies."
In Saudi Arabia, a financial analyst said he still believes there is a need for an appreciation of GCC currencies but opposed to unpegging.
Mahmoud Mohammed Shams, quoted by the Saudi Arabic daily Al Riyadh, said a revaluation of the Saudi riyal would support government efforts to tackle inflation, which is expected to soar to double digits this year.
"I am with a revaluation but not with unpegging," he said. "Unpegging the riyal from the dollar will hit the purchasing power of the riyal and this will have a major impact on the Saudi market. It will also sharply increase speculation on the riyal and this requires a highly qualified and experienced team at Sama to keep an eye on the riyal movements and global interest rates every minute. At present, Sama lacks this team so we cannot talk about an unpegging now."
Another expert said he believed GCC revaluation plans have become less likely following the recovery in the US dollar.
"Calls for a revaluation have largely receded. I believe that even if the dollar regains two thirds of the value it had lost over the past year, it will be better for Saudi Arabia to diversify its sovereign asset portfolio to include more currencies. This is much more feasible than unpegging."
In a recent study on the impact of a revaluation of GCC currencies, a US economist in Saudi Arabia warned the move would hit their foreign assets as a large part of them are in US dollar.
Oil producers in the Gulf are unlikely to revalue their currencies against the US dollar before they launch their landmark monetary union andecide on the common currency unit for that scheme, experts said yesterday.
Although the dollar's recovery over the past few weeks could weaken speculation about an appreciation of the GCC currencies, economists said the increase would not affect any revaluation plans.
"An appreciation of the GCC currencies has nothing to do now with the recovery or the decline in the US dollar as such plans have become closely linked to the common currency under discussion," Mohammed Al Asumi, a Gulf economist, told Emirates Business.
"Any currency changes in the GCC are now associated more with the monetary policy than the dollar movements. I don't expect any major changes in the existing currencies before the creation of the monetary union. As for the common currency, my feeling is that it will likely be pegged to a basket of currencies, in which the US dollar will be the main component."
Speculation escalated in 2007 about a GCC decision to appreciate national currencies against the US dollar following a sharp decline in its value and a surge in domestic inflation, for which the weak dollar has been blamed as one of the main factors along with soaring rents and food prices.
GCC states, expect Kuwait which quit the dollar for a basket of currencies last year, have sent conflicting signals on whether they would revalue their currencies or maintain the dollar peg. But speculation remained strong through the year, stoked by acceleration in inflation and further falls in the dollar.
While Saudi Arabia's Central Bank (Sama) has more than once hinted at a revaluation, the UAE has repeatedly indicated there are no such plans on the grounds the drop in the dollar is only temporary.
"There is no intention for the time being to unpeg our currencies from the US dollar because if you look at currencies worldwide, you will find that all of them keep fluctuating, rising some times and declining later. So the decline in the dollar is a temporary phenomenon and we should not build long-term monetary decisions on short-term issues. In other words, we cannot look for long-term solutions for short-term problems," UAE Central Bank Governor Sultan bin Nassir Al Suweidi, said recently.
"The dollar was steadily rising and with it, the GCC currencies were rising. It was a period of nearly 10 years while it has weakened for nearly three and a half years now. If we compare this period to the previous period, we find that it is a relatively short period. Our hope is that the dollar will rise again."
Suweidi said a decision by GCC states, which control 45 per cent of the world's oil, to detach their currencies from the dollar is not easy.
"Leaving the dollar is a very complicated issue and is even more complicated that you can imagine..It is not a simple matter that 'let's peg today and let's unpeg tomorrow'...this issue requires deep and long studies."
In Saudi Arabia, a financial analyst said he still believes there is a need for an appreciation of GCC currencies but opposed to unpegging.
Mahmoud Mohammed Shams, quoted by the Saudi Arabic daily Al Riyadh, said a revaluation of the Saudi riyal would support government efforts to tackle inflation, which is expected to soar to double digits this year.
"I am with a revaluation but not with unpegging," he said. "Unpegging the riyal from the dollar will hit the purchasing power of the riyal and this will have a major impact on the Saudi market. It will also sharply increase speculation on the riyal and this requires a highly qualified and experienced team at Sama to keep an eye on the riyal movements and global interest rates every minute. At present, Sama lacks this team so we cannot talk about an unpegging now."
Another expert said he believed GCC revaluation plans have become less likely following the recovery in the US dollar.
"Calls for a revaluation have largely receded. I believe that even if the dollar regains two thirds of the value it had lost over the past year, it will be better for Saudi Arabia to diversify its sovereign asset portfolio to include more currencies. This is much more feasible than unpegging."
In a recent study on the impact of a revaluation of GCC currencies, a US economist in Saudi Arabia warned the move would hit their foreign assets as a large part of them are in US dollar.
By Nadim Kawach
© Emirates Business 24/7 2008
