21 November 2007

Bye bye, Dollar

It's been a long few years, here in the GCC. Since 2001, the price of oil has been increasing, after remaining more or less controlled under the $30 level. Inflation levels in the region have been growing, and with the value of the US dollar falling quickly (and with our GCC currencies all linked to the value of the dollar) inflation has been pushed to even higher levels.

Inflation is a normal part of any growing economy. Economy grows, people get richer, demand increases, prices rise. It's as simple as that. However, there are reasonable levels to inflation, and what has been happening in the GCC is far from reasonable.

Have you realized almost everything has seemed to become more expensive? Rent? Land prices? Cars? Imports?

Why? Besides regular inflation, being linked to the value of the dollar means it costs us more to import goods. Pound Sterling was around $1.36 back in 2001, and this month it reached $2.11. Euro was around $0.83 back in 2001, and just yesterday it reached $1.48. Almost double. A similar situation goes with the other major currencies, and the dollar is forecasted to decline even further.

With the steady increase of oil prices after 2001, effectively tripling from around $30 to edging on the border of $100, the Gulf economies grew tremendously. Rapid growth has it's disadvantage, the greatest being inflation, and without increasing the value of the Gulf currencies (through being pegged to the dollar), inflation hits us hard.

So what happens next? Well, Kuwait took the first step a few months ago and dropped the dollar peg in favor of a currency basket (ie, pegged to a mixture of currencies), and the Kuwaiti Dinar has been rising in value since. The rest of the GCC is still dollar-pegged though. In reality, the Kuwaiti Dinar was only forced to peg in late 2003, and was looking for any excuse to de-peg.

Inflation is now causing societal and political issues; imports getting more expensive, workers demanding salary increases, and so on. The next step should come from either the UAE or Saudi, whose economies are under severe pressure to revalue. Bahrain or Oman are hardly likely to effect a decision, as they have shallow markets and have been sheltred from speculative inflows, and will probably follow suit regarding what Saudi/UAE decide. Qatar does have the highest inflation in the GCC, but compared to the other member countries, it has started to diversify it's economy later, and still has an under-developed currency market; also with a higher GDP than it's neighbors, it has a higher tolerance for inflation.

The situation with the UAE is a little off, however. Yesterday, the UAE decided to increase public sector wages by 70%. This stated, it might mean that they are against revaluing their currency, which would probably cause some issues with the other countries that want to revalue.

The GCC Supreme Council meeting is in December, and with the mounting pressure, something has to happen. In September, the decision was made to delay a monetary union between the GCC. However, for a commitment towards a common market and closer economic cooperation, perhaps a semi-mutual agreement needs to be made in terms of the dollar-peg situation, as no country will be able to drop the peg unilaterally without the consent of the other members.

The effects on global markets would not be small, however. The volume of funds under management by the GCC are around $1.5 trillion, and any abrupt shift could disturb the global market, and so such an issue needs to be very carefully addressed (ie, an already weak dollar could take a severe hit, if the market sees a de-peg as a sign that the GCC has turned it's back on the dollar).

Either way, the inflation problem is a very serious issue, and if left unaddressed it could damage the economy, and specifically the construction sector which affects a large part of the economic activity in the region. Realistically though, a currency revaluation is required, but not necessarily enough. A revaluation should be correlated with the size of the adjustment/inflation, which should probably be between 10-20%. However, with the Gulf countries being inherently conservative, it is much more likely that a realistic adjustment would come to around 4-5%. Therefore, other measures need to take place to reduce GCC inflation. However, it will buy the countries some time to formulate other policies controlling this issue.

All said, lets keep our eyes on the GCC Supreme Council meeting in December.


N. said...

Great info, I am wondering where can we get access to such great info. Online magazines? Which ones. You seriously sound like a writer for a financial column, which is cool. Will definitly be interested in the upcoming GCC meeting.

ammaro.com said...

You can get access to such great info right here on ammaro.com! :p

j/k... well, i actually get bits and pieces from all sorts of places, some from online news sites, some from reuters news (at work), some from conversation with people, TV, and just compile it myself with my opinions.

thing is, i don't usually do a lot of finance related posts since most people arent very interested. I try to keep it for the bigger events that actually affect everyone, such as this.

N. said...

You're right this isn't a very financial post, but none the less quite economical in nature. I thought there is a good online magazine like Business Week for the GCC or something, guess not. I only know of ameinfo but I have a hard time trusting these websites as they might have agendas, u know.

Yagoob's Dome said...

I'm quite ignorant when it comes to economic stuff but how do countries revalue their currency?


Evil Odd said...

I like your economic analysis of the situation. But don't you think you're providing a very level-headed (i.e. Western) opinion to a problem that is quite chaotic in nature (i.e. Middle Eastern)?

All cynicism aside. May the Bahraini dinar never be unpegged. My Aussie dollars are worth a truckload of dinars at the moment :)

ammaro.com said...

yagoob; thats fine. the basic idea of being pegged to a specific currency is the amount of reserves the central bank has of that currency. ie, bahrain central bank holds a large amount of US dollars in reserve. If it was to change to a basket of currencies, it would sell the dollars and buy a number of currencies instead.

Now, if all of the gulf did this, that would have an unbelievable effect on the US currency, and in turn, their economy.

China currently holds the biggest reserve of US dollars, at around one trillion dollars. There is also talk of a revaluation. Something like that could cripple the US.

Evil Odd; the problem is chaotic in nature, but the same basics still hold true. i've just touched on the tip of the iceberg here.

As for your Australian dollars, hold on to them for now.

KJ said...

A7la 3ammaro and his private financial column ;)

Informative man! I do not understand how the world works - in the end I AM a peasant - but what I know is that I now pay double for a piece of chicken and no one's salary is getting higher!!!

They should print more money and distribute it to people... I dunno why they just don't do it :P

ammaro.com said...

laaa ya kj! thats a big no-no economic terms! pushing more money into the economy just by printing it automatically lowers the value of the currency, so you'll have more of it, but its gonna be worth less

Fo0f said...

i've enjoyed this post too. being related to work and all :P no really, i was hoping something will happen with the new gulf united currency. but i guess it's gonna take longer time than i thought.

ps. to "N." there's a Gulf version of MEED magazine. also u can read the Financial Times online (u have to pay for it though)

N. said...

thanks! I got the website, awesome! :)

Jay Cam said...

wow that's not good!
but how could you burn that dollar!
poor george w

star warrior said...

well you may not have to burn that dollar, if it keeps going the way its going it could go all the way to zero and start again.. here's some links you can check out more on the US dollar, and why it is on purpose being devalued. not too mention talk of a North American Union means a new currency ending the US Dollar for good and replacing it most likely with the Amero..if people dont wake up out here in North America.

Confessions of a moody crab said...

I'm not surprised. The Amreican Dollar has been receiving some major hits since when countries like Iran/Venuzuela and (surprise! surprise!!) Iraq voiced their intention to move away from dollar and peg their currency to Euro.

I will be waiting for the outcome of GCC meeting. However, I don't think major financial decision(s) would be made. America has a firm grip on Saudi. Go figure...

Desert-Roses said...

wow..this is totally new..I didnt even heard about it..did our government did that??

I thought they will be the last one in GCC to do it :p

Yeah ..one of my plans when I get rich is to establish...hmm..shloan ten8al :p...madri shloan ten8al..eee
establish business that offers cheaper goods or services for ppl...I will turn KW to the other china..hehe...the good thingie is I wont as7ab 3yoon el awadem :p

palo-girl said...

most useful post/article/anything ive read on the net in a looooooooooooooooooooooooooong time

Woozie said...

The dollar has also been taking some major hits since the Bush administration's idea of fiscal responsibility was "If we're out of money, we just have to print more and borrow more." To their credit they've toned that down since 2006, but it's still outrageous.

This would make more sense if I knew what the GCC was :)

Zhu said...

I can understand inflation... after France ditched the Franc for the EUR, prices just kept on rising, rising... they still do. Unfortunately for the people...

ammaro.com said...

fo0f; any decision regarding unity between gulf countries will take ages. they have a problem agreeing on any issue.

jaycam; yup, not good at all. america is watching closely, very worried at what could happen if the gulf decides to unpeg

star warrior; that is a possibility, depending on the agenda of american policy makers. but honestly, i dont think so.

confessions; true, gulf countries dont have full freedom, with pressure being exerted from the big eagle

desert; youre a dreamer :) something like that takes a lot more than just an idea. good luck either way :)

palo; thanks. your thoughts?

woozie; GCC = gulf cooperation council. ie, the 6 countries of Saudi Arabia, Kuwait, Qatar, Bahrain, Oman and United Arab Emirates.

Zhu; true. italy used to be dirt cheap before the euro, but after the currency i visited venice. it cost 150 euros for a 30 minute ride in a gondola. thats just unbelievable

Desert-Roses said...

Yes I am, is it bad?
for certain stage of my life it was..
Anyhow I still dream even after or b4 any thing I do...

now lets get down to business...

lat5alini a7e6ha eb rasi ha?! :P..I would do it but I won't cuz I had to scarify somethings, things i wanted all of my life..anyhow I was joking bout that...

the only easy way is to wait my dad to pass away(ba3ad 3mor 6weel).. :P
bs i won't build me upon my dad's money...
see what a nice fighter me? hehe

star warrior said...

yea i agree i doubt anytime soon the dollar will be replaced by a new currency.. then again just that some one is even talking about it on CNBC is enough to say that the idea is in the works in some way now or from a long time ago around the turn of the century. also remember the dollar is legal tender, before the depression you could trade your dollars for gold, now forget it, it is a useless piece of paper when the circulation ends.. now we got nothing to keep the feds in check here in America. the real estate bubble has burst here in the US and very soon also the credit bubble, this country is in way too much debt. i doubt the dollar will rise anytime soon like before maybe after next election who knows.. things are pretty bleak here in the US.

SILVER said...

Thanks Ammar,
i was thinking if the N95, btw i have an offer for BD277 for the 8GB one. one question though, isnt it a bit bulky????

ammaro.com said...

desert; its good to dream, but remember to keep your feet on the ground. good luck with whatever you go through :)

star; the coming months look pretty bleak. from what i see, the worst of the mortgage crisis isn't over yet. the bigger banks are yet to announce their biggest losses...

silver; wrong post buddy :p anyway, its a great little phone, and no, not bulky at all! (again, that depends what you compare it to, but for all those features its hardly bulky) its pretty light too.