Sunday, November 04, 2007

Prepare for depegging? (Updated)

9 Nov - Gulf News
The UAE or Qatar may drop their currencies' pegs to the dollar within six months as inflationary pressures outweigh the benefits of maintaining the links, Merrill Lynch & Co said.

"We believe there is a significant risk of a change in the policy regimes of either the UAE of Qatar in the coming six months," Merrill Lynch said in a research note yesterday.
...
The central bank governors of Qatar, Oman, Bahrain and Saudi Arabia have all said a number of times since May that they have no plans to drop their currencies' pegs to the dollar.

Of course "no plans" does not equal "won't."

The Wall Street Journal, page A2, November 2, 2007 (subscriber link)
DUBAI, United Arab Emirates -- Oil-rich Arab sheikdoms, risking new inflation pressure, followed the U.S. Federal Reserve's lead by lowering official interest rates to keep their currencies aligned with the dollar.

Saudi Arabia, the United Arab Emirates, Qatar, Kuwait and Bahrain followed the Fed's decision to cut interest rates by a quarter percentage point.
...
The moves came despite concerns over rampant inflation in the region, which suggest central banks should be raising, instead of lowering, rates. Bankers said the policy conflict is building pressure on the Gulf states to unbind from the dollar.
...
With inflation expected to exceed 10% for a second consecutive year in the U.A.E., the emirates' ruling sheiks face the region's greatest fiscal policy challenge since the U.K. devalued sterling in 1967, forcing Gulf states to turn to the dollar as a benchmark.

When the emirates created the dirham in 1973 they linked it effectively to the dollar. Now bankers such as Deutsche's Mr. Azzam are unsure whether the U.A.E. is ready for another such change. "I don't think a depeg will happen because that's a regional decision and it has served the U.A.E. so far," he said.
...
Nowhere in the Middle East are the strains more acute than in the U.A.E., where investors are betting on a "depegging" of the dirham as domestic inflation pressures increase.

"Speculators are definitely bidding on a depegging, and that's why they're increasing their dirham deposits," Henry Azzam, Middle East chief executive at Deutsche Bank AG, told Zawya Dow Jones Newswires in an interview.

Attracting that money are chances of a quick profit once the peg snaps. Deposits held in the emirates' banks have exceeded one trillion dirhams ($272.3 billion) for the first time, more than is deposited in the region's largest economy, Saudi Arabia, latest central-bank figures show.

"The probability of depegging has increased," said Kamran Butt, Dubai-based chief economist at Credit Suisse Group. "The market consensus is for the U.A.E. to depeg."

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2 Comments:

Blogger nzm said...

Off topic but:

John - you need to put your email address on your blog.

Someone from Belfast in Ireland just searched yahoo and landed on my blog looking for "john chilton at sharjah email address"! :-)

8:26 AM  
Anonymous Anonymous said...

When I first arrived in the UAE, I heard that it was conventional wisdom that the US would never tolerate the UAE de-pegging.

However, I looked into this a little. The US has a positive trade balance with the UAE. De-pegging simply helps that situation.

What I'd worry about is places like ADIA and the other state-run investment vehicles. ADIA's portfolio is invested significantly in USD denominated instruments. De-pegging means their portfolio is instantly de-valued.

2:28 PM  

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