Gulf States Mull Revaluing Currencies, Person Says

Gulf States Mull Revaluing Currencies, Person Says (Update1)

By Matthew Brown and Anchalee Worrachate

Nov. 18 (Bloomberg) -- Gulf states, including Saudi Arabia and the United Arab Emirates, may revalue their currencies while maintaining their pegs to the U.S. dollar, a person familiar with Saudi monetary policy said.

The states may revalue by an unspecified amount in as soon as a month's time, the person, who declined to be identified because the matter is confidential, said yesterday. No final decision has been made, he said. The comments came as heads of state of the Organization of Petroleum Exporting Countries met in Riyadh.

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. ``Given the emerging inflation pressures, there are very good reasons for them to allow currency appreciation.''

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

Currency Basket

Saudi Arabia, Qatar, Bahrain and Oman have repeatedly said they have no plans to change exchange rate policies. Still, U.A.E. Central Bank Governor Sultan Bin Nasser al-Suwaidi said on Nov. 15 the U.A.E. may drop the dirham's peg in favour of a basket of currencies. Some economists recommend such a move.

``We believe that the basket will be more beneficial'' than a revaluation, said Monica Malik, a Dubai-based economist with EFG Hermes, Egypt's largest investment bank. ``Just re-pegging the currency would mean that GCC interest rates will still have to follow U.S. rates and imported inflation would still increase if the dollar continues to weaken,'' she said.

``Linking GCC currencies to a trade-weighted basket would enable Gulf countries to counterbalance any dollar weakness and provide greater flexibility on monetary policy,'' Malik said.

Heads of state from the six Gulf Cooperation Council states will hold their annual meeting in Qatar on Dec. 3-4 and will discuss monetary policy and security. The person did not specify if a decision would be made then. Evidence has been gathered and will be presented to policy makers, he said without giving details.

`Unlikely' Move

The leaders will, though, take a decision on whether to abandon a proposed Gulf single currency, Hamad Saud al-Sayari, governor of the Saudi Arabian Monetary Agency, said after a meeting of finance ministers and central bank governors 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 percent 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, taking it down 10 percent since the start of this year, and 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.

The riyal was trading at 3.725 to the dollar at 10.09 p.m. in Riyadh, 0.7 percent higher than the peg price of 3.75. 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.

Venezuelan Support

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. ``The issue of the dollar in our investments, we are tackling it. We are hedging; we have other instruments.''

Internal Conflict

Saudi Arabia's King Abdullah said OPEC shouldn't make oil a source of conflict, contradicting Venezuelan President Hugo Chavez who wants the oil exporter group to become an active ``political agent.''

``Oil is an energy for building and prosperity, it shouldn't become a means of conflict,'' King Abdullah said at the start of the group's summit in Riyadh yesterday. ``Those who want OPEC to become an organization of monopoly and exploitation ignore the truth.''

OPEC, provider of more than 40 percent of the world's oil, is holding its third heads of state summit since it was founded in 1960. Saudi Arabia's foreign minister clashed yesterday with a push by Iran and Venezuela to debate pricing oil in currencies other than the U.S. dollar.

``OPEC was born as a geopolitical force and not only as a technical or economic one in the '60s,'' Chavez said, speaking before King Abdullah. ``We should continue to strengthen OPEC, but beyond that, OPEC should set itself up as an active political agent.''

`Fair' Level

The contrasting view on OPEC's role in the world comes a day after a disagreement between Venezuela's Oil Minister Rafael Ramirez and Al-Faisal on whether to move away from the dollar was accidentally aired on live television.

Chavez said in his speech yesterday that he's confident OPEC will do what it can to keep oil prices at a ``fair'' level, adding that if Iran was invaded, prices could easily rise to $200 a barrel.

Crude oil for December delivery rose $1.67 to $95.10 a barrel on Nov. 16 on the New York Mercantile Exchange.

The last OPEC heads of state summit was in 2000 in Venezuela and was hosted by Chavez, who was sworn in as president a year earlier. Iran and Venezuela both have tense political relations with the U.S.

Ibrahim Ibrahim, an executive at Qatar Petroleum, said that while Venezuela has helped OPEC become a stronger organization over the years, ``there is no need for OPEC to be a political force now. It just has to ensure that the oil market is stable.''

From: Bloomberg.com