For some observers, a much awaited trend is beginning to take shape in the Middle East: that of Arab countries ditching their pegs to the American greenback in favor of adopting pegs to the euro — the currency of 13 of the European Union’s 27 current members — or a basket of mixed currencies. A move that would be much hailed by the local citizenry in the region as overdue; but not so warmly welcomed by regulators in the US entrusted with maintaining the US dollar hegemony.
Managing exchange rate regimes and mitigating risks of global repercussions from currency volatilities may well be the economist’s version of Michelangelo’s challenge to paint a perfect picture on the ceiling to the Sistine Chapel. That’s why central bankers reside in the top levels of the worldwide financial decision making mechanism. Between the various options of using a gold standard, applying limited currency management, trusting all-out in the market with a floating exchange rate, or going the opposite way of fixed exchange rates, central banks in emerging markets usually have to select the least undesirable from a list of evils, on top of which they may be subjected to political interference.
The case for abandoning the dollar peg in the Gulf has been made repeatedly in the past, as the international financial markets have shown a tendency to migrate toward currency floats of varying openness and the International Monetary Fund has supported discussions of countries allowing greater exchange rate flexibility. The issue has become intensely pressing for the countries of the Gulf Cooperaion Countries (GCC) this year, as their enormous current account surpluses from dollar-denominated oil exports coincided with a weakening of the greenback.
Moving away from the dollar
The dollar has lost value against a host of foreign currencies like the euro (-11%) and the Australian dollar (-8%) in 2006. The prospect of a prolonged sliding dollar makes central bankers in the MENA region anxious since they sit on a large amount of greenbacks. And a weakening dollar has also caused rampant inflation across the region forcing many in and outside the official circles to question the continued peg of the GCC’s national currencies to the dollar, despite the project of creating a joint GCC currency by 2010 for which the dollar peg was considered important.
Regional examples for a move away from a strict dollar peg prominently include Egypt, whose 2003 decision to attempt using a floating exchange rate regime has been used as a case study by the IMF. Syria toyed with announcements of changing its unofficial dollar peg for about two years, with political overtones because of US sanctions against the country.
But the first member of the GCC to break ranks and ditch the US dollar is Kuwait. Known for being a prominent US ally in the region, Kuwait made global headlines in late May when it announced that it has de-linked its dinar from the dollar and opted for a basket of currencies instead. Its central bank did not disclose the weighing of the currencies in the basket but analysts concluded from recent movements of the dinar that the dollar still accounts for the lion’s share in the basket.
Syria formally announced only in mid-August that it will peg the Syrian pound from now on to the IMF’s special drawing rights (SDR), instead of the dollar. And now, observers, and currency traders see signs that the United Arab Emirates (UAE) — the region’s most vibrant economy — might be heading down the same path saying that currency traders are betting on this development as Forwards Market Contracts show what the market is betting on.
Forwards are agreements where dealers agree to deliver currency, commodities, or financial instruments at a fixed price at a specified future date. Trading in the contracts allows investors to bet on the value of a currency that isn’t fully convertible or hedge investments denominated in it.
“If the next few months confirm further questioning of the monetary union project, the UAE and Qatar will be the next candidates for revaluations, be it straight ones or through a peg to basket of currencies,” Koceila Maames, Middle East economist at French bank Calyon, said in a research report. As the GCC countries throughout have to be concerned with calming their overheated economies, analysts recently also have spoken of signs that the region’s economic powerhouse, Saudi Arabia, is considering de-linking its riyal from the dollar.
A weak dollar against other international currencies was the main driver behind the rise of costs of imports which are denominated in the euro for most GCC states. This, economists say, has started the wheels of inflation rolling full speed ahead at a time when GCC countries do not have the ability to raise interest rates out of step with the US Federal Reserve. UAE’s inflation rate was reported to be around 9% in 2006 by the government, but international agencies say it is around 10.1%. Inflation in Kuwait hit 5% in the first quarter of 2007, up from 3.9% in December 2006. Inflation in Saudi Arabia rose to a five-month high of 3.1% in June this year as food and housing costs climbed, official data showed.
Some consumers in the Middle East appear to believe that the dollar is the world’s currency and have a superficial perception that a numerical exchange rate of better than one to the dollar for a local currency is indicative of its strength whereas currencies would be weak if a dollar buys several dirham, dinar, or pound.
But beyond such misperceived appearances, it is undisputed that governments in the region had to align their monetary policies to those of the United States because of the pegs of their national currencies to the greenback.
This move meant that when the US raises or reduces interest rates or when it increases its money supply, countries whose currencies tied to the dollar would have to follow suit. This, observers said, forced regional governments to set their interest rates along the lines of US policies, making them too low for their much faster growing economies. This led to unhealthily spiraling credit expansion and caused inflation.
On the international level, the dollar made up 64.7% of global currency reserves in the fourth quarter of 2006, down from 65.8% in the prior three months. The euro’s share was 25.8%, the highest since its 1999 debut, an IMF report showed.
The pegging dilemma
Part of the dollar dilemma for the GCC is that only around 10% of Gulf imports are from the US while Asia accounts for more than 40% of imports into the region, Eckart Woertz, an economist at the Gulf Research Center in Dubai, said. He added that the peg “erodes the asset values of GCC countries which hold a majority of their investments in dollars, increases import bill, and erodes the purchasing power of wage earners, especially of expatriates.’’
Another matter of concerns for the GCC is budget surpluses from high oil prices, fueling multibillion-dollar infrastructure projects and the resultant economic growth across the region had caused property prices to go out the roof in countries like the UAE and Qatar. Unchecked inflation, lack of preparation for fast economic growth combined with high unemployment rate in the GCC makes the issue even more complicated. Analysts say that as long as monetary policy is tied to a weakening dollar, the situation will only worsen.
Inflating the UAE
The United Arab Emirates, the second-largest Arab economy after Saudi Arabia, had an inflation rate of 10.1% in 2006 compared to 7.8% in 2005. Although they won’t admit publicly, UAE government officials are very much concerned about the weakening dollar and as a result of the inflation — mainly caused by the peg of the dirham to the dollar and a jump in the price of housing — the government has introduced new laws to curb it.
“The Ministry of Economy is working hard to curb inflation through a number of steps including a recently drafted competition law, which is awaiting the final approval from the Ministry of Justice,” Sheikha Lubna al-Qasimi, the UAE’s minister of economy, said in a government report. “Prices of housing units and services increased 15.3% according to each Emirates economic growth and real estates’ map,” the report added.
But the hike in real estate prices is not the biggest factor when the reconsidering a monetary policy. One problem with the situation is that the governments seem very reluctant to speak openly about the challenges they face on the exchange rate front. Officially, the UAE line on this issue is that there is no serious consideration to change the peg. But a top Lebanese analyst told Executive that if one wanted to know what a government is going to do with its currency, “listen to what they say they aren’t going to do … then expect the opposite.”
The UAE’s Central Bank governor, Sultan Nasser al-Suweidi told reporters in Switzerland, while speaking on the sidelines of the annual meeting of the Bank for International Settlements, that the UAE will not rule out the option. “No, we are not ruling it out, but we will have to move together,” he added. ‘Together’ means the rest of the GCC countries. And to further support this premise, earlier this year, the UAE’s Central Bank acted on a planned move to convert 8% of its $25 billion dollar-denominated foreign-exchange reserves to euros.
Analysts take these remarks and steps as an indication that the country might be heading down the same path as Kuwait. Observers point out that certain measures and trends such as the Forwards Contracts show that the UAE might be the next GCC country to say goodbye to the dollar in favor of a basket of currencies. If this happens, it would not be long before the remaining countries like Saudi Arabia fall in line.
Saudi Arabia’s turn
Off the record, a number of Saudi politicians have started to question the wisdom of the kingdom’s policy of tying the riyal to the dollar. A main reason behind these doubts is that a weak dollar creates havoc in the economy through inflation and restricts the country’s monetary policy. In June, a top Saudi financial analyst said that he was baffled why Saudi Arabia in particular and the GCC states in general continue to peg their currencies to the weakening US dollar.
“The question is what are the real reasons for continuing the same policies for long periods of time without any changes or amendments?” Mohammad Bin Abdullah al-Suwayed asked. “Pegging the Saudi riyal to the dollar is not a sacred matter that cannot be changed. It is a legacy of previous eras when the government was the sponsor and supervisor of the country’s economic development, which was financed from oil revenues generated in dollars,” he opined.
Inflation has been on the rise as profits from oil revenues continue to spur economic growth, increasing demands for goods and real estate. Al-Suwayed said the biggest problem with the kingdom’s monetary policy is the continuation of government control in economic development. He proposed increasing the participation of the private sector in this regard.
Wait! Jordan too
Calls by your average Joe and politicians to end the archaic policy of pegging the national currency to the dollar are not restricted to the GCC countries. As mentioned, Syria has already taken the step and now Jordanian politicians are calling for the same.
“Jordan should follow Kuwait’s steps in linking the dinar to a basket of currencies, because the drastic decline in the dollar’s value is having negative repercussions on the Jordanian economy,” Jaafer Hourani, a member of Jordan’s parliament said in a recent public statement, arguing that Jordan, like other countries in the region, experiences inflationary pressures and an erosion of purchasing power because of the peg.
The Jordanian dinar has been pegged to the greenback for over 12 years and official policy by the country’s Central Bank is to uphold the ties between the dinar and the dollar as this policy has provided Jordan the stability it needs when conducting commercial activities outside the region. But Hourani believes that the motivation behind the continuation of the dinar-dollar link is motivated by “political reasons” and not economic ones.
The bottom line
There is a consensus across the board in the region: the dollar peg is not helping to curb inflation and is restricting the development of solid monetary policies. Furthermore, a dollar peg does not provide the flexibility small countries need in a global economy. Local experts agree that all the GCC currencies are undervalued by at least 25%. And should the trend of declining dollar continue — and most observers believe it will, due to solid economic performance by the euro zone and higher inflation in the United Kingdom — the GCC will continue to suffer the consequences.
But the economic effect of the dollar peg is only one component of the equation. The second and more prominent in people’s mind and even in the official circles is the political one. Observers agree that the MENA region as a whole has been under public pressure to dissociate from the United States due to its biased Middle East policies — both on the political and economic front. On the official level, many leaders and businessmen were appalled by the United States decision to block Dubai Ports World from buying five American ports in a multi-billion dollar deal in March of 2006. The move clarified to the Arabs that Arabophobia is rampant in the United States government or at least in the circles of neo-conservatives and certain minority groups. Gulf countries are the West’s most steadfast Middle Eastern allies, yet they are treated like second-class citizens.
Another aspect of the debate is the six-country GCC plan for a single currency by 2010. This is now in doubt after Oman said it would not be able to meet all the requirements by the target date and Kuwait’s move to delink its dinar from the dollar. But this can be addressed: if GCC bankers can agree on a basket composition then perhaps a total rejection of the dollar peg is forthcoming, and as such, plans for a single currency will not be totally abandoned.
If this happens it would only be part of a global trend of keeping the dollar at bay. The world has advanced a great deal since the dollar was the single leading currency in the days from World War II up to 1971.
Rotana merges with LBCSat for a stronger position in the pan-Arab TV market
Rotana satellite television, owned by Saudi Prince Al-Waleed bin Talal announced in August that it is merging with the Lebanese Broadcasting Corporation Satellite (LBCSat), in an effort to achieve a stronger position in the pan-Arab TV market.
“LBCSat channel and Rotana channels will be integrated under one management, but they will remain administratively and financially independent,” a person in LBC close to the matter told Executive.
He added that both channels are not planning to merge under one entity at this stage, but the person, who preferred to remain anonymous, said that Pierre El-Daher, LBC chairman and CEO, will continue to be the chief executive officer of LBC channels and under the agreement, El-Daher will oversee the Rotana channels which include Rotana Clip, Rotana Music, Rotana Khaleejah, Rotana Tarab, Rotana Cinema and Rotana Zaman as well as the LBCSat channel.
When contacted by Executive, LBCSat declined to provide further details about the merger, saying that the plan is still not clear and that they will issue a statement once they have new developments to disclose. According to LBCSat, the reason behind the merger is to achieve a stronger position in the pan-Arab TV market by building a platform of complementary channels offering the best TV content to Arab audiences.
In 2003, Prince Al-Waleed bought a 49% stake in LBCSat at a cost of around $98 million. Al-Wadeed said that the partnership between LBCSat and Rotana marks an important moment in the cultural and social development of the Middle East. “Pierre and I share the same vision and the drive to elevate the Arab world in the global community,” he said. “A vibrant media scene is an important part of this goal and so our deal with LBCSat is a step in the right direction.”
Asked whether they’re planning to list shares on bourses in Lebanon or the Gulf, the person from LBCSat said that in the long-run, when both companies are merged into one, an initial public offering is definitely going to be one of the options; however, “it is premature to speak now of any IPO details.” Earlier, El-Daher told pan-Arab daily Asharq Al-Awsat that the aim behind the merger is to list the TV station on the bourse, a process which requires procedure and time. But according to media reports LBCSat will probably be listed on the Dubai Financial Market or the DIFX, but not on the Saudi stock exchange.
