GCC fears loss from currency revaluation

 

 

Gulf oil producers have resisted inflationary pressure to end a long-standing link between their currencies and the US dollar as they fear this could inflict heavy losses on their coffers, analysts said yesterday.
 

Unpegging or appreciating their currencies against the dollar could partly ease the inflation problem but they could end up paying a much heavier price in terms of sharp declines in their overseas assets and oil revenues, they said.

 

Gulf Co-operation Council (GCC) countries, which pump a-fifth of the world’s oil supplies, are already reaping the windfall of high oil prices but are also believed to be reeling under a loss of more than $400 billion (Dh1,469bn) from the US sub-prime crisis.

“We estimate the loss of Gulf sovereign wealth funds (SWFs) from that crisis at more than $400bn but it remains a phase or a paper loss as these funds had made massive profits in previous years,” said Henry Azzam, Chief Executive Officer of the Deutsche Bank in the Middle East and Africa.

“For this reason, I don’t think Gulf states will take a decision now to unpeg or revalue their currencies against the US dollar… doing so will only increase the losses of their sovereign funds.

“I believe unpegging Gulf currencies at this stage will be an irrational decision at a time when the dollar could recover soon.”Azzam estimated the SWF’s assets at more than $3trillion at the end of 2007, including nearly $1.5trn in acquisitions, bank deposits and securities.

“The assets controlled by GCC governments are mostly long term investments and I think they are now counting on a gradually recovery of the global economy to compensate their losses, which I don’t think are very high given the large size of that wealth,” Azzam said yesterday.

 

Speaking at a Gulf conference in Abu Dhabi this week, UAE Central Bank Governor Sultan Al Suweidi said a revaluation of the GCC currencies is not an easy issue and required a decision by the heads of state.

Speculation has mounted over the past year about a possible GCC decision to revalue their currencies on the grounds this could curb inflation that has soared to record levels and hit double digit rates in some members.

But according to the International Monetary Fund and GCC officials, a revaluation would not fully tackle the inflation problem because higher prices of imports from non-dollar countries play only a small part in rising inflation in the region.

Most of them have blamed surging rents and food prices because of domestic demand caused by an upswing in the oil-reliant GCC economy.

 

“Moving away from the dollar will not have a big impact on the problem,” said Mohsen Khan, Head of the Middle East and Asia Department at the IMF.

“For this reason, I don’t think ending the peg is the right solution… besides, Gulf foreign assets could lose nearly $400bn in case they appreciate their currencies by 20 per cent.”

 

In a study on inflation in Saudi, a prominent US economist based in Riyadh said any unpegging decision by Riyadh could hurt its fiscal system.

“Oil revenues are earned in dollars and converted into riyals for budgetary spending. A revaluation would permanently impair the riyal value of oil revenues, reducing the size of the current budget surplus and accelerating the day when the budget falls into deficit.

The value of the governments mostly dollar-denominated foreign assets, currently in excess of $240bn, when converted into riyals would also be cut,” said Brad Bourland, chief economist at Jadwa, a key financial and investment centre in Saudi Arabia.

 

“Looking at all the arguments for and against a change, we think the best policy option for the time being is to do nothing. However, the time will come eventually when it will make sense for Saudi Arabia to move away from the dollar peg.

The two main reasons for an eventual change would be first, that the economy will have diversified significantly away from dollar influences, and second, that the government will need independent interest rate setting tools as businesses and individuals become more indebted. We do not see these conditions in place for many years,” said Bourland.

 

GCC sovereign funds have not disclosed the impact of the sub-prime crisis on their performance as they do not publish financial results for political reasons.
 

A former GCC economy official said it is time for member states to start publishing performance figures following growing Western calls for monitoring  activities of institutions.

 

“There have been increasing calls in the West for stronger control of these funds on the grounds they might use their resources for political rather than economic goals, though studies have shown these investors have always managed their wealth responsibly and have never used it to achieve political gains,” said Abdullah Al Quwaiz, former GCC assistant secretary-general for economic affairs.

“But it is time the GCC sovereign funds start looking for a mechanism to measure the performance of their investments and announce the results to their citizens.

They could compare their performance with those of other investment banks, but since the assets of these funds are normally long-term investments, their performance should not be judged in one year,” he said.

 

$400bn: The amount GCC countries, which pump a fifth of the world’s oil, have lost due to the credit crunch caused by the US sub-prime crisis.