EU crisis may stall planned GCC currency

When oil-producing Gulf Co-operation Council (GCC) states decided to cap long-standing efforts to merge their economies through the creation of a landmark monetary union, their eyes were on what they viewed as a flawless euro zone. The current European Union (EU) crisis seems to have shaken that view.

After their ambitious plan for a single currency was jolted by the withdrawal of the UAE and Oman, the euro zone crisis could be just another blow. GCC officials have already started talking about a delay in launching the single currency and their statements have sent strong signals across the region that the proposed single currency might not materialise.

Economists polled by Emirates Business appeared to share the consensus that the GCC currency would be postponed. But while some of them blamed the EU crisis, others said the delay would come from within. "The EU's problems will certainly raise questions that are pertinent to the GCC. The GCC monetary union has already been delayed due to region-specific reasons," said John Sfakianakis, Chief Economist at Banque Saudi Fransi (BSF).

"Delays and challenges stem from within the GCC rather than from external influences such as the EU. The euro and the EU won't disappear and the GCC Union's future depends on the participating member states," he added.

Another economist based in Saudi Arabia, the headquarters of the newly-created Gulf Monetary Authority (GMA), said the Greek-EU financial crisis would prolong the time-table for a GCC currency and could prompt Gulf nations to focus more on eco-political issues.

"The timeframe for the GCC single currency was always going to be drawn out, given the large number of institutional and statistical issues that are still to be resolved," said Andrew Gilmour, Senior Economist at the Saudi American Bank Group (Samba).

"The crisis in the EU may add somewhat to this timeframe as GCC states are now likely to focus on the more sensitive political economy issues surrounding fiscal policies and public debt levels."

Serious misgivings

The crisis in the EU, the largest economic partner of the 29-year-old GCC, has triggered speculation on whether the Gulf monetary union would be its latest victim on the grounds that Gulf countries have sought to build their currency plan on the euro zone model.

GCC central bankers and other financial officials have frequently visited the EU over the past years to get acquainted with its monetary experience, which they had always viewed as being successful. The GCC has also sought assistance from the International Monetary Fund (IMF) to lay the grounds for the future GCC currency, which is initially scheduled to be launched in 2015.

"As a reflection of the sophisticated nature of the technical, legislative and institutional requirements, I don't foresee the currency will be launched in 2015," GCC Secretary-General Abdulrahman Al Attiyah said this week, in pessimistic remarks about the Gulf currency after the eruption of the eruo zone crisis spawned by Greece's massive debt. In Doha, Qatar's Prime Minister was quoted by the Germany News Agency (DPA) as saying on Wednesday that "there will be no GCC single currency within two years as this issue requires more time".

GCC members of the monetary union – Saudi Arabia, Qatar, Kuwait and Bahrain –decided to move ahead with the plan when they created a landmark Monetary Authority, which will pave the way for the establishment of the region's first Gulf Central Bank.

Analysts believe the plan is still beset with obstacles and the GCC needs to closely watch the EU crisis. "The GCC single currency has originally been delayed as a result of serious political misgivings among member states. But it so happens that the delay has coincided with the global financial crisis and its lagged effects as currently manifested in Greece. This should give GCC officials time to look into what has been neglected in the euro zone," said Ali Aissaoui, Head of Research at the Dammam-based Arab Petroleum Investments Corporation (Apicorp), an affiliate of the 10-nation Organisation of Arab Petroleum Exporting Countries.

"Clearly, the rules of the European Stability and Growth Pact will not pass the current stress test. The key issues being currently debated in the European context include pooling fiscal governance, a concept that could cover inter-state budget co-ordination and fiscal transfers between member countries. To my knowledge, these issues have just about to be contemplated in the context of the GCC."

Debate on common currency

Aissaoui's view is shared by BSF, which has advised the GCC to watch the EU crisis to avert a similar crisis in its own currency plan.

"European financial markets will inevitably unfold across the globe, hurting equities, commodities and currencies alike – and the Gulf region is no exception. The GCC will also have to watch EU crisis management techniques, which could have implications for its own beleaguered monetary union plan," BSF said in a study. "The Gulf would look to assess the institutional mechanisms needed to support members who run into fiscal and liquidity problems."

Riyadh-based Jadwa Investments is another Saudi institution sounding pessimistic about the future of the GCC monetary plan in case the Greek crisis deteriorates. "The progress within the GCC comes at a time of exceptional strain within the euro zone stemming from economic problems in Greece. These could have implications for the GCC single currency," it said.

"Much of the preparatory work in the GCC plan for a single currency was based on what preceded the introduction of the euro and technical support from the European Central Bank has been used widely. Therefore, in the unlikely event that stresses in Greece or elsewhere irrecoverably damage the euro zone, it could trigger a rethink within the GCC about the single currency."

Standard Chartered Bank went further by questioning whether there was a need for any common GCC currency. It said GCC central banks agreed at their meeting a few weeks back that there is no need for a new deadline for a currency after the first one in 2010 was missed on the grounds that member countries lacked what it described as basic supranational institutions. "The real question is whether there is a need for a common currency in the first place," said Marios Maratheftis, head of research at the bank.

Cancellation unlikely

According to another analyst based in Abu Dhabi, the EU crisis would definitely delay the GCC currency plan but would not cancel it. "This is a vital project that has been cherished by all Gulf citizens for years… While the EU crisis could put it off, I don't think it will abolish it," said Humam Al Shamma, Financial Advisor at Al Fajer Securities.

"The problem in the GCC is that its members have failed to reach an agreement on the headquarters of the central bank; so how are they going to agree on budgets and other sensitive fiscal issues? I believe this project will be put on hold until the right conditions are realised. I also believe that the Gulf single currency requires a political rather than an economic will and that GCC leaders are well aware of this fact."

Another Abu Dhabi-based analyst said GCC countries, which have similar oil-based economic and financial systems, need to derive lessons from the EU crisis before pushing ahead with their project. "Look how a relatively small country like Greece has jolted the euro zone that was launched 10 years ago and was admired by the whole world, look how the strong euro has crumbled. I think GCC leaders should consider that development," said Ziad Dabbas, Financial Advisor at the government-controlled National Bank of Abu Dhabi.

"I am sure the crisis in the EU, if it drags on, will delay the GCC currency plans. My feeling is that the GCC countries will decide to postpone the project and wait to see the outcome of the EU crisis," he added.

In its latest report, a prominent US finance centre said it expected a delay in the GCC currency union although much of what it described as technical and policy convergence criteria have been achieved.

In Dubai, a company executive said she believed the GCC common currency would take more time and urged currency members to learn from the EU crisis and build a strong institutional base for their union.

"The recent problems in Europe have highlighted the risks of a common currency without a strong political union. Where there is a common currency between sovereign nations, it is vital that there are strong institutions to co-ordinate fiscal and economic policy and take punitive action against those member states that threaten the stability of the monetary union," said Khatija Haque, Vice-President, Research, Shuaa Capital, a key financial and investment firm.

"There needs to be a strong, independent central bank for the union and rules on financial regulation and banking supervision, for example, need to be consistent across the member countries. It is unclear at this stage whether the GCC states that plan to join the monetary union have developed the institutional capacity that is required to ensure that economic and financial policies are co-ordinated across member states and are also appropriate for each country's individual economic situation."

She said such a move is critical to prevent the kind of imbalances that exist in the EU, adding that it takes time, resources and strong political commitment to build up these institutions. "I think recent developments in the EU have highlighted the importance of getting this right before implementing the GCC common currency, even if it takes a little longer than expected," Haque said.

Delay despite progress

In its latest report, the Washington-based Institute for International Finance (IIF) said the GCC had made substantial progress in the monetary union and that the door was still open for the UAE and Oman to rejoin at a later stage after pulling out for different reasons.

"The introduction of a single currency for the region, planned for 2010, has now been delayed although most of the technical and policy convergence criteria have been achieved," it said.

"The GCC economies have largely unrestricted intra-regional mobility of goods, labour and capital. Little progress has been made in putting the institutional arrangements in place for a functioning single currency including harmonisation of statistics and the development of an efficient payments system."

It said there was a need for the development of an appropriate monetary policy framework and a common system of payments and settlements, as well as the establishment of mechanisms for cross-border payments and liquidity transfers in the common currency.

"Also, there is a need to set up a common accounting framework and adequate budgetary procedures. Above all, the creation of a central fiscal authority, whose critical importance has been illustrated in the euro zone in recent weeks, would be a daunting task but is essential to the success of a GCC-based monetary union over the long term."

The four GCC monetary union members have not yet defined the type of currency they plan to launch but officials have said they will stick to the US dollar peg for the time being before deciding on whether to maintain that peg or shift to a basket of currencies of their main economic partners, of which the dollar could have the main share.

The four members have sought IMF help on a possible revaluation of their currencies when the monetary union, the first in the Middle East, goes in full swing.

In a working paper released recently, the Washington-based IMF suggested a slight appreciation in the currencies of these members against the US dollar but warned that any leakage of news ahead of the revaluation could spark damaging speculation. "This paper developed from an informal request to one of the authors by a member of the GCC Secretariat for guidance on how to set the conversion values for the new GCC currency," it said.

"If, hypothetically, the GCC decides to establish the new currency on its original planned date, Saudi Arabia would need to revalue its currency by 2.94 per cent, Kuwait by 5.15 per cent, Qatar by 4.54 per cent, and Bahrain by 1.09 per cent. The methodology provides an estimate of the required adjustment for each currency if the conversion is to take place in 2011, 2012 or 2013."

(With additional reporting by Abdel Hai Mohamed, Waheed Abbas and Karen Remo-Listana)

WHAT ANALYSTS SAY

- Certainly, the European problems will create questions that are pertinent to the GCC.

—John Sfakianakis

- The time frame for the GCC single currency was always going to be drawn out...the crisis in the EU may add somewhat to this timeframe.

—Andrew Gilmour

- The GCC single currency has originally been delayed as a result of serious political misgivings among member states.

–Ali Aissaoui

- The real question is ? ?whether there is a need for a common currency.

–Marios Maratheftis

- This is a vital project that has been cherished by all Gulf citizens for years…while the EU crisis could put it off, I don't think it will abolish it. –Humam Al Shamma

- I am sure the crisis in the EU, if it drags on, will delay the GCC currency plans…my feeling is that the GCC countries will decide to postpone the project and wait to see the outcome of the EU crisis.

—Ziad Dabbas

- The recent problems in Europe have highlighted the risks of a common currency without a strong political union.

—Khatija Haque

- European financial markets will inevitably unfold across the globe, hurting equities, commodities and currencies alike – and the Gulf region is no exception.

The Gulf will also have to watch EU crisis management techniques, which could have implications for its own beleaguered monetary union plan. —BSF

- Much of the preparatory work in the GCC plan for a single currency was based on what preceded the introduction of the euro…therefore, in the unlikely event that stresses in Greece or elsewhere irrecoverably damage the euro zone, it could trigger a rethink within the GCC about the single currency. —Jadwa

Follow Emirates 24|7 on Google News.