Dirham revaluation can’t be ruled out, says NBAD

 

  

The UAE’s revaluation of the dirham’s peg to the dollar “can’t be ruled out” as the country’s central bank prepares to publish annual inflation data next month, the state-controlled National Bank of Abu Dhabi (NBAD) said in a note on Sunday.

 

Revaluation would be “the most palatable of a number of options” open to the UAE central bank, which may say 2007 inflation rose to 10.9 per cent from 9.3 per cent in 2006, Giyas Gokkent, NBAD’s head of research, told Bloomberg.

 

NBAD is Abu Dhabi’s biggest bank by market value. Central banks in the six Gulf Co-operation Council countries, including Saudi Arabia and Qatar, are under pressure to revalue their currencies as the dollar declines, stoking inflation to record levels. Kuwait was the first to drop its peg in May, choosing a basket of currencies instead. The dollar has dropped in five of the past six years, and fell to a three-week low against the euro on February 23 on speculation the Federal Reserve will cut borrowing costs next month to avert US recession.

 

UAE central bank Governor Sultan bin Nasser Al Suwaidi said on January 3 the country will not drop the 30-year-old system of pegging the dirham to the dollar and does not see a need to revalue the currency because rising rents are the prime cause of inflation. The central bank governors of Saudi Arabia, Qatar, Oman and Bahrain have also said they have no intention of revaluing or dropping their pegs.

 

The note said that food prices rose by about eight per cent in 2007 on the weakening dollar, rental prices probably rose by 19 per cent compared to 15.4 per cent a year earlier. Even though 61.8 per cent of inflation is attributable to rents, “regardless, a one-time revaluation would have a one-off anti- inflationary impact”, Gokkent said.

 

Estimates by real estate companies were quite a bit higher. According to the data from real estate firms, Ajman had the highest annual percentage rent increase in 2006, followed by Abu Dhabi and Dubai. Abu Dhabi and Dubai accounted for 67 per cent of the UAE population according to the 2005 census. Addition of Sharjah brings the figure up to 87 per cent. The number of housing units naturally reflects this. The trend in the three main emirates has been high rent increases in both 2006 and 2007, but a lower percentage increase in rents in 2007 in comparison to a year earlier.

 

If one were to translate this observation to anticipate 2007 official rent increase estimates, then one would expect a slower rise than the 15.4 per cent registered a year earlier. The official rent increase estimate is expected to come in at 18-19 per cent for 2007.  This is consistent with a rough (because of a number of assumptions for simplicity) UAE weighted estimate that is calculated in the table based on data from independent sources.