THE COLOUR OF MONEY The UAE may be forced to revalue the dirham as inflation affects core businesses (SALAM KHAMIS)
Prominent UAE business personalities have for the first time voiced their demand that the Central Bank sever or dilute the dirham’s close link to the US dollar. Their comments come close on the heels of a report that the Gulf states will meet in the next few days to discuss revaluing their dollar-pegged currencies together.
As speculation mounted that more Gulf states would follow Kuwait and abandon the link to the dollar, UAE Central Bank Governor Sultan bin Nasser Al Suwaidi was forced to make a categorical statement that his country has no such plan.
UAE Foreign Minister Sheikh Abdullah bin Zayed Al Nahayan reiterated yesterday that the country will only revalue its currency in tandem with its Gulf neighbours and the change will not happen in the short term.
“We are going to take the appropriate decision, but only as the GCC,” Sheikh Abdullah told Reuters in Bahrain. “But there isn’t any thought of taking such a decision in the short term.”
The Bahraini Foreign Minister, Sheikh Khaled bin Ahmed Al Khalifa told Reuters yesterday that the finance ministers and central bank governors of the six countries will meet “in the next few days” to discuss a shift in exchange rates.
“Although a stronger European currency helps attract more European investors to the country’s growing real estate projects, the real issue hurting businesses is inflation and the rising cost of imported raw material,” said Hussain Sajwani, Chairman of the $30 billion (Dh110bn) Damac Group, in a phone interview to Business 24|7. Sajwani feels the dirham should be de-pegged and linked to a basket of currencies, with the dollar as the largest component.
“The dollar peg must be done away with,” echoed Ismail Al Naqi, Director of Dubai Outsource Zone, which houses the back-end offices of companies from around the world. “Besides the rising cost of imported raw materials, the other issue is the cost of quality workers. Prospective employees are no longer finding their packages attractive,” he said.
Saif Ahmed Belhasa, Chairman of the Saif Belhasa Group, believes that revaluation will only be a short-term solution. “You [revaluate] now, you might have to do it again in the near future. A fast-growing economy like the UAE’s must be flexible in its currency value. They should switch to a basket of currencies. Relying on one currency is not advisable.”
Youssef Nasr, Chief Executive of HSBC Middle East, has meanwhile struck a note of caution. He said the falling value of the dollar is not necessarily a bad thing for the United States or the UAE. “I was not surprised at the decision taken in Doha. I never saw any great bandwagon developing here to de-peg the dollar. We realise that only part of our inflation problem is imported, so it would not make that much difference if we de-pegged,” he said.
Damas Group Chairman Tawhid Abdullah also soft-pedaled the need to de-peg, but said: “The falling value of the dollar may be hurting some businesses in terms of the rising cost of materials and manpower, but it is also making us more competitive in our export markets in Europe and Asia.
“Given the high inflation, I would like to see the dirham linked to a basket of currencies around early 2008, with the non-dollar component comprising five per cent. Depending on the results, you can consequently have it increased to about 10 per cent by 2009.”
Dubai Properties CEO Mohammed Binbrek said: “I do not think the decision to de-peg or revaluate would affect the business of Dubai Properties. As the value of the currency stands right now, it is making it easier for investors from Europe and Asia to invest here. The only real inflationary pressure that is being exerted as a result of the dollar peg is in terms of interest rates. Whenever the Fed cuts interest rates, you will have to mirror the move over here. I think the market forces should be left to determine the value of the currency. The government does not have to make a move.”
Khalaf Al Habtoor, Chairman of the Al Habtoor Group, has taken the strongest stand on this issue. “The dirham must be de-pegged immediately. The leadership of the country has to make a decision on this now,” he said. “The implications of the dollar peg have really begun to affect businesses and markets,” said Al Habtoor.
He said the weakening greenback is taking “a severe toll on local businesses” as imports from Europe and Asia grow.
Investment bank Shuaa Capital last month predicted that the UAE was likely to revalue the dirham in early 2008. A research note said the bank expects the revaluation to be in the range of three to five per cent followed by a de-pegging towards 2009.
Shuaa Director Walid Shihabi told Business 24|7 yesterday that he stands by that forecast.
Standard Chartered said last week that the GCC will face pressure to revalue “sooner rather than later” amid expectations that the United States Federal Reserve will cut interest rates further this week.
What you need to know about the dollar peg
So why is the dirham pegged to the dollar?
The UAE, like the five other Gulf Co-operation Council members, first fixed their currencies to the US dollar to provide economic stability. With oil the primary export for the Gulf states, it made sense for them to peg to the US currency because oil is priced in dollars. The peg has been very successful, steadying the sometimes rocky Gulf economies. However, with the likes of the UAE diversifying away from the hydrocarbon sector, the resultant emerging economies are posing new challenges that the dollar peg seems ill equipped to tackle.
What’s the problem now?
The UAE and United States have widely diverging economies, with the US struggling under the weight of its housing crisis and credit crunch, while the UAE is one of the fastest growing countries in the world. Yet the UAE has to follow US monetary policy because of the peg, which is fuelling inflation.
The falling dollar also means that expatriates are suffering as their wages decrease relative to their home currencies, so the UAE is becoming a less attractive destination for its foreign workforce.
If the dollar peg is causing so many problems, why is the GCC taking so long to do something about it?
Since the current oil boom started in 2002, the GCC states have been able to build up dollar reserves to a total of $3.5 trillion (Dh12.86 trillion), according to some estimates. These reserves will fall in relative value if the respective currencies are allowed to appreciate, meaning state-funded projects will be more expensive.
Why is the US dollar so weak?
The falling dollar is a victim of the spiraling US current account deficit, which has more than doubled since 1999 to reach Dh2.6 trillion in the second quarter of 2007. Foreign inflows of cash into US bonds and assets service this imbalance, but with the current account debt increasing, the battered greenback has been pushed down to attract overseas money.
Who hates the dollar the most?
Mahmoud Ahmadinejad hit the headlines last month when he claimed the falling dollar would be followed by the collapse of the ‘US empire’ and described the American currency as worthless piece of paper.