Barclays: UAE experiencing deflation

Emirates 24|7:

Inflation will reverse from an average of 12.3 per cent in 2008 to -1.5 per cent in 2009, Barclays Capital said in a report. The decline in CPI inflation in the UAE is expected to increase in the second half of this year, it said in a report.

In spite of the government's expansionary fiscal policy and liquidity injections, the mounting deflationary pressures are likely to stay till the end of the year, Barclays Capital said.
[...]
Continuing weakness in domestic demand, driven by a projected decline in population and falling wages, would be a key short-term driver.

Besides, sustained easing of food price pressures globally; and depressed real estate prices that should drive rental prices to even lower levels (notably in Dubai) would act as other factors contributing to the trend, the report said.

Read it all.

UAE central bank does the unexpected

Khaleej Times:

The UAE central bank surprised markets last week by not reducing interest rates following the 50 basis points reduction by the US Federal Reserve.
...
In a research note “The United Arab Emirates: An Unexpected Decision,” Morgan Stanley commented that the decision not to lower rates may have been partly based on several factors.These include concerns over potential excess liquidity, reversal of speculative pressures on the dirham in forward markets and continuing concerns about inflation.
...
The report also questioned the need for any monetary tightening, “It is not clear why additional monetary tightening would be needed to combat inflation considering that: (i) rental pressures are expected to stabilise over the next two years; (ii) international food prices have started to decline; (iii) the US dollar has appreciated significantly over the past 3 months; and (iv) credit growth is expected to slow down substantially over the coming year as the banks’ access to foreign funding is reduced.”

Other reports:
- The National
- Emirates Business 24|7

40 million percent inflation

The official annualized rate of inflation in Zimbabwe in June was 11.2 million percent.

"The actual figure could be high as 40 million percent in June," said independent economist John Robertson.

"The actual figure for July could be as high as 300 million percent, while for August it could be 600 million percent," he added.

Zimbabweans' solution? Use gas coupons as currency.

Shortages in everything

There's a shortage of large bills in Zimbabwe. The newly introduced $1 billion note will buy 4 oranges.

Maybe they should just print more money. Without withdrawing smaller bills from circulation. Heh.

Inflation in the UAE

Inflation in UAE stands at 12% - Gulf News

DPE [Abu Dhabi's Department of Planning and Economy] estimates that during the first three months of this year, inflation surged past 11.5 per cent while the index for rents, electricity and water was up 18.21 per cent from a year earlier.

The index for food, beverages and tobacco gained 19.78 per cent.

While DPE identifies rent as the single most important component, it acknowledges other factors such as the declining value of the dollar and the surging liquidity from oil surpluses as major contributors to rising prices.

It would be of interest to know the weights used. Food and rent are major portions of the budgets many families. Then there is the cost of private tuition at all levels of education. According to reports those have increased - certainly more than 12% per annum.

There was good reason to believe inflation was 15 to 20% two years ago. I have my doubts that inflation is as low as 12% today.

Readers, what do you think?

Note to self

Get in the habit of reading the Financial Times Mideast page. Currently highlighted:

Saudis plan to grow crops overseas -Riyadh is in talks with Ukraine, Pakistan, Sudan, Turkey and Egypt to set up projects of at least 100,000 hectares to grow cereals that will secure its food supply- Jun-13

Output slides in Gulf in spite of oil boom - The region’s labour markets need to be modernised as research reveals productivity decreasing outside the oil and gas sectors, threatening sustainable economic growth - Jun-12

MidEast cools on smelter plans - Rising energy prices are causing oil-rich governments to change their minds about hosting large aluminium projects amid worries about giving away energy reserves cheaply - Jun-13

Viewpoint: Inflation fight involves painful choices - Higher oil prices drive up inflation in countries that import oil, but producers themselves face serious inflationary pressures when oil prices rise - Jun-11

Green light for de-pegging?

The National

The UAE and Qatar could abandon their currency pegs to the dollar and move to a basket of currencies within months, causing a five per cent appreciation before the end of the year, a Merrill Lynch report said yesterday [May 25].
...
Saudi Arabia was unlikely to follow until late next year, Merrill said in the report entitled “US green light for the GCC”.

The US Treasury made mention of Gulf currencies for the first time “in recent history”, according to Merrill. The US investment bank took the focus on rising inflation as a sign that Washington no longer fears that the dollar will weaken significantly or that it will begin to lose its status as the world’s reserve currency if governments in the six-member GCC remove their pegs.

Removing the dollar peg would allow Gulf central banks to raise interest rates as a means of constraining money supply and controlling inflation. However, many UAE officials have spoken publicly against such a move because it could cause instability and reduce the value of their dollar-denominated savings in dirhams.

While recognising that the inclusion of GCC currency issues in the US Treasury report represented only “a modest change in focus”, Merrill concluded that it was nevertheless “a big signal for the currencies of the GCC”.

All of inflation's little parts

Very cool graphic showing the inflation pie. For the U.S., that is. It would be nice if the UAE had inflation data like this.

Via Growthology.

Speaking of inflation, Zimbabwe, you ain't seen nothin' yet. Perhaps the Mugabe's Obesity Tourism Strategy isn't working. (Thanks for that one, Juandos.)

Egypt arrests 500

Bloomberg

Egypt's government said police arrested more than 500 people across the country as it suppressed a one-day national strike to protest rising food prices.

Two hundred textile workers were arrested in the northern town of Al-Mahala El-Kobra, said a spokesman for the Interior Ministry, speaking on condition of anonymity, in accord with departmental policy. Police prevented a rally in Cairo's main Tahrir Square and also made arrests in the towns of Alexandria, Mansoura and Mahala.

Egyptian state employees from doctors to factory workers are demanding higher wages after a jump in food prices around the world pushed up the cost of living in a country that imports about half of its grain.

Today's arrests came as President Hosni Mubarak, Egypt's longest serving leader in modern times, increases pressure on his critics. Police arrested at least 140 members of the outlawed Muslim Brotherhood, the country's biggest opposition group, last month and a journalist was sentenced to six months hard labor for reporting that Mubarak was ill.

Demonstrators outside the headquarters of the lawyers' guild in Cairo today shouted slogans including: ``Keep burning us with prices and you will be burned by chaos soon'' and ``Down, down with Mubarak.'' Egyptian inflation accelerated to 12.1 percent in February from 10.1 percent in January. Bread and grain prices have jumped more than 25 percent in the past year.

Inflation in the UAE, Oman and elsewhere

An analysis of inflation in the regional economies from the Gulf Research Centre in Dubai says,

Inflation is at 16-year highs in Saudi Arabia and Oman, a 19-year peak in the United Arab Emirates and just below record levels in Qatar. Disparate trends and obfuscating analyses abound. This is obvious in the absence of scientifically modeled dataset on the macro trends of the GCC economies; leave alone the unbalanced or non-existent consumer price indexes (CPI), particularly in case of the UAE. ... As per our estimates, inflation rates in Bahrain, Kuwait, Oman and Saudi Arabia were 8.4 percent, 6.6 percent, 5.3 percent and 6.5 percent respectively, in comparison to a staggering 12.8 percent and 11.3 percent in Qatar and the UAE.

Read it all here.

Will the dirham remain pegged to the dollar?

Mugabe-cide Economics

Some things in life you just can't buy. Like inflation statistics in Zimbabwe.

BBC:

Zimbabwe's chief statistician has said it is impossible to work out the country's latest inflation rate because of the lack of goods in shops.
"There are too many data gaps," the Central Statistical Office's Moffat Nyoni told state media.

Many staple goods are often absent from shop shelves after the government ordered prices to be halved or frozen in a bid to stem galloping inflation.

September's inflation rate was put at almost 8,000%, the world's highest.

Other reports suggest the rate could be at near 15,000% and the International Monetary Fund had warned it could reach 100,000% by the end of the year.

Mugabe-cide economics would be funny if it wasn't so sad. From an earlier BBC report:

People are starving. The evidence is in the hospitals where tiny, wizened babies lie dying in their cots while their mothers look on helplessly.

One mother cradles a child who is losing her hair and her skin, a sign of the most advanced form of Kwashiorkor or vitamin deficiency.

It is certainly the first time I have seen this condition in 20 years of reporting on the developing world.

"Zimbabwe once offered the most comprehensive medical service in Africa," a doctor explains. "It is now becoming a textbook case of medical horror."

GCC currencies and the dollar drama

'Independent decisions likely' on currency peg - "The Gulf states are discussing the issue of regional currency pegs to the dollar and ideally there should be a regional consensus at the GCC level, failing which many countries are likely to take independent decisions, said Dr Omar Bin Sulaiman, Governor of the Dubai International Financial Centre."

UAE keeps up pressure for dollar peg review - "The Saudi riyal hit a 21-year high and investors bet on an appreciation of 2.4 per cent in a year after a source familiar with Saudi policy said the kingdom could consider its first revaluation since 1986."

Tools limited in inflation fight - ' "Since January 2001 and until September 2007, the dollar lost around 32 per cent of its value against the euro and 27 per cent of its value against the British pound. Imports from these countries constitute around a third of our total imports. Since the dirham is pegged at a fixed rate to the dollar, the prices of imports from these countries have risen in dirhams, leading to imported inflation," the UAE Ministry of Economy revealed in a report yesterday.'

Saudi Riyal Touches 21-Year High - "UAE Central Bank Gov. Sultan Nasser Al-Suweidi said last week he too could start tracking a currency basket including the euro, but would only act along with Saudi Arabia and three other oil producers preparing for monetary union as early as 2010. The UAE is under mounting social and economic pressure to drop the peg, Suweidi said on Thursday in an interview that drove the dirham to a five-year high."

Not to put too fine a point on it

We appreciate the accuracy: Mugabenomics drives inflation rate to 14,840.6 percent.

Sitting ducks are on offer :: Telegraph

Back in October, in The Telegraph

The wolf packs are circling. Fifteen years after George Soros smashed the sterling and lira pegs of Europe's Exchange Rate Mechanism, central banks have invited hedge funds to pounce again. This time on a global scale.

Sitting ducks are on offer across Eastern Europe, the Middle East and emerging Asia, each offering an irresistible one-way bet for speculators with deep pockets.

What the candidates all have in common is inflation, the ever-higher penalty they pay for chaining their destinies through currency pegs and dirty floats to the dollar and the euro, the currencies of two enfeebled blocs – one a fat roué at the end of his credit, the other a stooped old gentleman with a stick.

The global M3 money supply is growing at 10.6pc as stimulus from America, Europe – and Japan, through the carry trade – leaks out to the vibrant parts of the world economy.

Money is expanding at 18pc in Saudi Arabia, 19pc in China, 24pc in India, 36pc in the United Arab Emirates, 41pc in Russia and 69pc in Venezuela.

With the usual lag, inflation has at last hit. Prices are rising at 6.5pc in China, 9pc in Russia, 9pc in Vietnam, 11pc in the UAE and 12pc in Qatar – to name a few.

Only nations with very rigorous monetary regimes seem able to resist this tide of liquidity. Most are floundering. Hence the rush by investors to profit from these unrestrained bubbles by piling into their stock markets.

Kuwait became the first Gulf state to ditch its dollar peg. Others are hanging on, but inflation has reached 10pc in the United Arab Emirates and 11.8pc in the gas-rich neighbour of Qatar.

They have balked at cutting interest rates in lockstep with the Fed. So have the Saudis. This makes pegs untenable over time. Matt Vogel, of Barclays Capital, says a riyal "carry trade" has already begun in Saudi Arabia. Speculative flows are surging into the kingdom.

The Gulf region has $3,500bn under management in reserves and wealth funds. It has the firepower to shoot wolves, but does it make any sense to do so? Buying dollars leads to even more inflation. In any case, Qatar has already slashed the dollar share of its $50bn investment fund from 99pc to 40pc. The game is up.

Further east, Vietnam is throwing in the towel as inflation hits 9pc. It said it will no longer hold down the dong by massive purchases of US bonds.

Plenty of metaphors on offer as well.

If you've not watched this informative video it is well worth your time:

Dirham under fresh pressure :: Gulf News

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."

Dubai Strife

The Wall Street Journal, page A8, November 1, 2007 (link for subscribers):

DUBAI, United Arab Emirates -- In this oil-fueled boomtown, which runs on imported labor, the dollar's sharp tumble is contributing to civil strife.

In recent days, thousands of expatriate construction workers walked off job sites to protest low pay and the rising cost of living. Law-enforcement officials -- who typically play down the scope of labor actions here -- have acknowledged widespread protests, isolated violence and dozens of arrests.
...
[O]fficials are finding it more difficult to deal with what has increasingly become one of the workers' chief complaints: A weak dollar, coupled with rampant inflation, means it is hard to send enough money home to make it worth sticking around.
...
The World Bank estimates that $20.75 billion in remittances was sent in 2006 from the four Gulf countries for which it has numbers: Bahrain, Kuwait, Oman and Saudi Arabia. Remittance data are difficult to track, and other estimates put outflows from the Gulf much higher. When the dollar falls against home currencies, those remittances don't go as far.

At the same time, soaring domestic demand for such things as housing and imports has stoked inflation across the Gulf. Because of its dollar link, the UAE's central bank typically can't use monetary levers, such as raising interest rates, to battle inflation. The UAE's inflation rate was 9.3% last year and is expected to be around 8% this year, according to the International Monetary Fund.
...
In recent interviews, officials at the ministries of economy and labor say there is no sign of an impending labor shortage. Plenty of workers are eager to come into the country to take the place of leaving workers, they say.

IMF appreciates the Dirham

Babu Das Augustine, Banking Editor for Gulf News writes

Despite assertions by GCC central banks in the past that the dollar's weakness has little to do with domestic inflation in the region, the IMF said yesterday that the weakening dollar has added to inflationary pressures in the GCC countries which have pegged their currencies to the dollar.
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The IMF has called on the GCC governments to rationalise spending to the absorptive capacities of their respective economies to avoid any excessive demand-led overheating.
...
The World Economic Outlook report said that the GCC states are expected to move towards independent monetary policies to fight inflation that will eventually have an impact on the status of the pegged currencies and the exchange rates. "Inflationary pressures are expected to persist in GCC countries as domestic demand expands in response to the increasing wealth, and the exchange rates should appreciate in response to these developments," the WEO said.

My emphasis.

The October World Economic Outlook is available here.

Revaluation of the dirham?

Some "experts" say its likely.

The Khaleej Times

Predicting a 30 per cent possibility for an imminent revaluation of the UAE dirham, monetary experts said the UAE currency needed a significant appreciation of 35 per cent against dollar to regain its intrinsic strength in relation to other currencies.

Gary Dugan, Chief Investment Officer, Global Wealth Management, Merrill Lynch, told Khaleej Times that the GCC currencies needed to appreciate by around 35 per cent to reduce excessive savings. “In the shorter term, we expect the UAE or Qatar will move to peg versus a basket of currencies this year.”

As the article notes the UAE central bank has insisted it is not going revalue or more to a peg.

GCC Monetary Union delay likely

Gulf News

The Gulf central bank governors, who met in Saudi Arabia in early September, announced that the 2010 target is not realistic, but said that they would work towards an early deadline.

Suwaidi's statement is the first by a Gulf central bank governor that has admitted that the currency union project could be behind schedule by more than five years.

The UAE Central Bank governor said that the GCC states are behind in achieving common currency parameters such as free flow of capital and people across borders, compatible laws in land and property ownership and tax laws. "Allowing corporations to establish branches, expand their businesses, buy and hold property and flows of people, these are beyond the control of central banks," he said.
...
Meanwhile, the UAE Central Bank governor said monetary policy has very little to do with inflation control in the UAE. ...

"I think it is fiscal policy planning, expenditure by the government that has to be phased in a way that will have housing units before you have the influx of people who will do the developmental projects," he said.

It's both. Of course when you've pegged your currency to the dollar monetary policy is straightforward.