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MENAFN - Arab Times - 07/11/2010

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(MENAFN - Arab Times) The weak US dollar is not a concern for Gulf economies and Kuwait is likely to increase spending in its budget for the next 2011/12 fiscal year, the OPEC countrys finance minister said on Saturday.

The dollars slide has caused concern among oil producers as it pushes down the value of their dollar-denominated oil revenues while the price of their commodity imports, such as grains, have been increasing.

However, when asked whether there was any concern about the impact of the weak dollar on Gulf Arab economies, Kuwait Finance Minister Mustapha al-Shamali said: No.

Inflation levels in the GCC are not worrying, Shamali was quoted as saying by KUNA, Kuwaits official news agency.
The dollar hit an 11-month low against a basket of currencies earlier this week.

Kuwait, unlike its fellow Gulf oil producers, abandoned its currency peg to the dollar in 2007 in favour of a currency basket to rein in then soaring inflation, which is on the rise again.

A weak dollar also tends to lift oil prices as money shifts from the currency market to commodities in search of better returns.

John Sfakianakis, chief economist at Banque Saudi Fransik, said a weak dollar would have some impact on inflation across the Gulf region but did not see any change in Gulf countries currency regimes.

There is plenty of evidence today that the Gulf economies as a whole will neither consider de-valuing or depegging from the dollar as it is neither prudent nor serves an economic purpose, Sfakianakis said.

However a further weakening of the dollar will have some inflationary pass-through impact, he added.

Price pressures are highest in Saudi Arabia and Kuwait with inflation above 5 percent, whereas in the rest of the Gulf Arab region inflation is more benign.

Shamali also told reporters on the sidelines of a meeting of Gulf finance ministers and central bank governors in Kuwait that the Kuwait governments expenditure would rise in the next fiscal years budget.
There is some increase in the budget but we are discussing it, he said.

The worlds fourth-largest oil exporter ramped up spending by more than 34 percent in its current budget for 2010/11, which began in April, partly to diversify its oil-reliant economy and increase the role of the private sector.

The OPEC members 2010/11 budget forecasts a deficit of 6.58 billion dinars or nearly 21 percent of gross domestic product, assuming oil, the key revenue earner, would fetch 43 a barrel.

Benchmark US crude ended at 86.85 a barrel on Friday.

Analysts say Kuwait is set to post the biggest surplus in the Gulf of 18.9 percent of GDP in 2010/11 because its oil price estimate is well below market prices.

Kuwaits budget surplus rose to 5.43 billion dinars in the first six months of the fiscal year ending next March.

A sustained high rate of inflation in some Gulf Cooperation Council states might force a halt fiscal stimulus as early as 2011, a senior International Monetary Fund official warned on Saturday.

Comfortable fiscal and external positions permit most GCC countries to maintain fiscal stimulus in 2010 and into 2011 if necessary, John Lipsky, IMF first deputy managing director, said in a statement.

However, in some countries we are seeing early signs of a pickup in inflation. If sustained, this may call for a withdrawal of stimulus as early as 2011, Lipsky said after a meeting with GCC finance ministers and central bank governors.

Lipsky said the outlook for GCC countries has improved considerably thanks to the ongoing global recovery and the stabilisation in oil prices.

Inflation in five of the GCCs six states soared to double-digit figures before the global financial crisis, but then eased. Qatar, for example, posted inflation of 15 percent before the crisis and deflation during it.

But in recent months, prices have begun to rise again, with Saudi Arabia hitting an inflation rate of more than five percent and Kuwait recording the highest inflation rate in 18 months in September at 5.3 percent.

The GCC states, which import almost everything, have blamed rising food prices for the current surge in inflation.

In its quarterly regional outlook released two weeks ago, the IMF urged the oil-rich Gulf states to raise spending in 2011 and maintain expansionary fiscal policy.

Several GCC countries were able to implement a financial stimulus in the wake of the global financial crisis that alleviated its effect on their economies.

Lipsky also said short-term challenges facing the GCC states will be to support a revival in credit growth, which decreased sharply with the global downturn.

The IMF official also told reporters that relative stability in energy prices had a positive impact on the GCC economies and their recovery.

We have seen a rebound in growth in the non-oil sector of the regions economy, and we think that is going to continue in 2011, he said.

Oil prices
The International Monetary Fund does not see a rise in oil prices as a threat to the global economic recovery and will closely monitor a new round of US policy easing, a senior IMF official said on Saturday. No, it seems that in the current environment the energy prices seem to be responding to strengthening growth certainly relatively close to a range that has appeared consistent with continued expansion in the global economy Lipsky told reporters.

Benchmark US crude touched a two-year peak of 87.43 a barrel on Friday after stronger-than-expected US jobs data.

Asked about the US Federal Reserves decision this week to expand monetary easing with a commitment to buy 600 billion in government debt to try and bolster a faltering US recovery, Lipsky said: We will be watching closely to see the impact of this development.

The IMFs chief economist Olivier Blanchard said on Thursday that the Feds economic stimulus would intensify capital flows into emerging markets, which could be destabilising.

The US central banks decision has drawn criticism from a number of nations who say it is generating global instability by ramping up their currencies against the dollar, potentially inflating asset bubbles and stoking inflation in their economies.

The six Gulf Cooperation Council states have moved closer to fully implement their much-delayed customs union and only administrative hurdles remain, Gulf officials said on Saturday.

There is consensus over the customs union and even there is a unified GCC law on customs, GCC assistant secretary general for economic affairs Mahammed al-Mazroui told reporters at the end of a GCC finance ministers meeting.

But there are some hurdles which the ministers have studied ... These are only administrative difficulties relating to movement of goods between the GCC member states, Mazroui said.

As long as there is integration and joint work, there will be some hurdles and efforts will be exerted to sort them out, he said.

The GCC official told the opening session that achieving economic integration requires all concerned committees to accelerate performance and remove the remaining obstacles to the customs union and common market.

In September, the energy-rich bloc decided to postpone implementation of the customs union in the face of disagreement over the sharing of tariff revenues and problems meeting World Trade Organisation (WTO) rules.

But the council agreed on establishing an electronic clearing mechanism for settling customs duties between the GCC states - Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.

Kuwaits Finance Minister Mustafa al-Shamali told reporters after the meeting that his GCC counterparts had agreed to implement the electronic system, and he played down the remaining obstacles to a customs union.

The customs union was launched at the start of 2003 for a three-year transition period. But issues of revenues, dumping and protectionism repeatedly have delayed its full implementation.

Mazroui said the GCC states have tasked the customs union committee with reviewing the unions mechanisms every year for the next five years.

The customs unions final aim is to create a free trade zone to facilitate the movement of goods among the GCC states and between the Gulf and the outside world.

Shamali said the ministers also discussed a Bahraini proposal to set up a pan-GCC fund for financial and economic stability. Manama has been asked to submit a detailed working paper on the issue at the next meeting.

They reviewed a Qatari proposal to establish a development bank, while Mazroui said the ministers had approved amendments to a unified anti-dumping law to fall in line with WTO requirements.

The ministers and GCC central bank governors were scheduled later on Saturday to meet with a senior International Monetary Fund official.


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