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MENAFN - Khaleej Times - 27/02/2007

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(MENAFN - Khaleej Times) DUBAI — The currencies of the UAE, Bahrain, Oman and Saudi Arabia face the imminent prospects of getting revalued by up to 30 per cent in the wake of meeting of the governors of the GCC Central Bank scheduled for next month.

At their meeting in Saudi Arabia, the central bank governors are likely to review currency pegs to the US dollar and may agree to switch to another currency or a currency basket.

According to Deutsche Bank AG, the UAE dirham and Bahrain dinar would be revalued by between 10 and 15 per cent while Saudi and Oman currencies could be revalued by 25 to 30 per cent. The bank did not rule out the revaluation of Kuwaiti dinar and Qatari riyal, but pointed out that they are estimated to be around fair value.

In its "GCC macro outlook" report, the bank said large current account surpluses in the GCC suggest currencies may have been overly competitive. However, the bank, noting that forex appreciation will not change the US dollar price of oil, said current account surpluses will be fairly unresponsive to any revaluation.

The International Monetary Fund recently said both currency revaluation and measures to stimulate economic growth in the GCC would be on its agenda.

Currency revaluation speculation is normally focused on the Chinese yuan but GCC currencies also increasingly under scrutiny these days as 250 billion US trade deficit with the Middle East oil producers are higher that the 200 billion trade deficit with China.

According to analysts, the immediate fallout of a dirham revaluation would be that euro-priced products will become cheaper, dampening consumer price inflation. "There would also be a one-off currency gain for the owners of local real estate. But on the other hand, the region would become more expensive for some tourists and the inflow of foreign money might falter as assets would be more expensive."

The UAE Central Bank governor also hinted out on the possibility by saying "we (the governors) could come to the conclusion that we need to change." Speculation about a revaluation was rife since the dollar fell around 10 per cent against the euro in 2006.

The dollar's slide has driven up the cost of imports in the region, where some countries, such as Kuwait, pay for half their imports in euro and yen.

Kuwait, which allows its dinar to trade in a 3.5 per cent band around a reference rate set in 2003, revalued the currency in May for the first time in 17 months, allowing one per cent appreciation against the dollar. The move sparked a currency rally across the Gulf, as investors bet other countries, especially Saudi Arabia, would follow suit. GCC countries except Kuwait have been maintaining fixed currency pegs to the dollar for the past three decades.

The bank also said that GCC hopes of launching a common currency by 2010 may be delayed. "Conflicting statements from GCC officials during recent months leads us to believe a delay to the 2010 date."

Oman recently questioned the viability of 2010 as the year for a scheduled monetary union in the GCC. The UAE Central Bank has suggested that a more limited currency union might be achieved without a central bank through the fixing of currency rates and issuing of currency rather than an institutional union. This is practical as long as the dollar peg is maintained.

On the prospects of a common currency in 2010, the report said: "This will require structural, monetary and fiscal convergence for the union to be successful."

"Structural and monetary convergence is already well-advanced reflecting high energy dependencies and 20-year de-facto pegs against the US dollar."

But it said that fiscal convergence was much lower reflecting differing oil dependencies across countries.

"Fiscal convergence is likely to become increasingly difficult going forward as these economies are set to structurally diverge," the report said. Fiscal policies refer to policies related to taxation and government expenditure and revenues. A convergence of these policies implies a harmonious relationship between the fiscal policies of different countries.


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