Gulf states will discuss revaluing their dollar-pegged currencies

By Zainab Fattah and Matthew Brown
Bloomberg News Service
Sunday, November 18, 2007

http://www.bloomberg.com/apps/news?pid=20601087&sid=aZIwiAaR.w_Y&refer=home

RIYADH, Saudi Arabia -- Gulf Arab heads of state, most of whose currencies are pegged to the U.S. dollar, will jointly discuss a proposal to revalue their currencies in December, the secretary general of the Gulf Cooperation Council said.

"It's true," Abdul Rahman al-Attiyah told reporters in Riyadh, Saudi Arabia, today in response to a question about a Bloomberg News story that Gulf states, including Saudi Arabia and the United Arab Emirates, might revalue their currencies in a single step.

A proposal to change the value of the currencies will be considered at the heads of state summit in Doha, Qatar, on Dec. 3-4, al-Attiyah said. "This case will be presented to the leaders for them to study," he said. The leaders may then pass it on to an advisory committee, according to al-Attiyah.

Asked whether his country plans to revalue the riyal, Saudi Arabia's central bank Governor Hamad Saud al-Sayari said: "I will confirm in the clearest language that there is no change in policies." He was speaking in an interview in Kleinmond, South Africa, where he attended a meeting of financial officials from the Group of 20 nations.

Gulf states face record inflation, caused partly by the weakening dollar that has made imports from Europe more expensive. Consumer prices rose a record 4.9 percent in Saudi Arabia in August and inflation in the United Arab Emirates accelerated to a record 9.3 percent last year. Qatar has the highest inflation rate in the region, reaching 14.8 percent in the first quarter.

"It makes sense for them to do it," said Jens Nordvig, senior global markets economist at Goldman Sachs Group Inc. in New York, in a phone interview. "Given the emerging inflation pressures there are very good reasons for them to allow currency appreciation."

The Gulf Cooperation Council is an economic and political grouping of six Gulf Arab oil producers. They are Saudi Arabia, the U.A.E, Kuwait, Qatar, Oman, and Bahrain.

The decline in the value of the dollar is a "concern" to OPEC members, Qatar's Energy Minister Abdullah Al-Attiyah said after a meeting of OPEC oil, finance and energy ministers in Riyadh Nov. 16.

Saudi Arabia, Qatar, Bahrain and Oman have repeatedly said they have no plans to change exchange rate policies. U.A.E. Central Bank Governor Sultan Bin Nasser al-Suwaidi said on Nov. 15 the country may drop the dirham's peg in favor of a basket of currencies. Gulf currencies are under pressure as investors bet governments cannot manage inflation and keep their pegs.

The leaders will make a decision on whether to abandon a proposed Gulf single currency at next month's meeting, Hamad Saud al-Sayari, governor of the Saudi Arabian Monetary Agency, said after a meeting of finance ministers and central bank governors in Riyadh on Oct. 27.

"It's unlikely they are going to move to a flexible system," Nordvig said. "If they're going to make an adjustment, they should make one that matters. Something in the 5 to 10 percent range seems like a range that would have some impact without being overly dramatic."

The dollar slid to a record low of $1.4752 against the euro on Nov. 9, bringing it down 10 percent since the start of this year, and it has fallen versus 15 of the 16 most actively traded currencies tracked by Bloomberg in the past 10 1/2 months.

The Saudi riyal rose to a 20-year high after the Fed cut rates on Sept. 18 and the Saudi Arabian Monetary Agency chose not to follow. The riyal and the dirham rose this week after al- Suwaidi questioned the U.A.E.'s currency peg.

Contracts to buy U.A.E. dirhams in 12 months' time rose the most in at least 10 years on Nov. 15 after al-Suwaidi's comments, and were trading at a 2.5 percent premium to the spot price yesterday.

Venezuela backed an Iranian proposal to add the group's concern over the falling dollar to a summit declaration to be made today. Saudi Arabian Foreign Minister Prince Saud Al-Faisal said that no mention of the dollar should be made in the declaration because he didn't want the U.S. currency to "collapse."

Nigerian Finance Minister Shamsudeen Usman said on Nov. 16 his country's law has been changed to allow it to diversify its foreign reserves out of dollars. Angola may shift its international reserves away from the dollar, Finance Minister Jose Pedro de Morais said.

OPEC's $6 billion development fund is hedging its exposure to the weakening dollar, Director-General Suleiman Jasir al-Herbish told reporters in Riyadh yesterday.

* * *

GATA is grateful for financial contributions, which are federally tax-deductible in the United States.