DUBAI, 14 September 2007 — The United Arab Emirates is most likely to revalue its dollar-pegged currency, and is more likely to do it next year than this, a Reuters poll of 17 economic analysts showed.
Of the analysts, 13 said the UAE was most likely to revalue, two said Qatar and one said Saudi Arabia, according to the poll taken between Sept. 10 and Sept. 12. “The UAE displays similar problems to those evident in Kuwait before it dropped its US dollar peg,” said Caroline Grady, an economist at Deutsche Bank. Grady expects the UAE will allow the dirham to appreciate later this year.
Kuwait broke ranks with its Gulf Arab neighbors in May, dropping its peg to the US currency because the dollar’s slide in global markets was fueling inflation. Inflation in Kuwait hit 12-year highs above five percent for three consecutive months to May 31.
Saudi Arabia was the country least likely to revalue, according to the poll. The other countries in the poll were Oman and Bahrain. Of those who think the UAE is the country most likely to revalue, almost two-thirds said it was unlikely or very unlikely this year, the poll showed. Six think it is likely or very likely next year. Four think it is unlikely or very unlikely.
The UAE and four of its neighbors have repeatedly ruled out a change to currency policy despite pressures from a weak US dollar, an expected US Federal Reserve interest rate cut, record oil prices and rising inflation.
Inflation in the UAE, the third-largest Middle East oil producer, hit a 19-year high last year of 9.3 percent. “It is a perfect storm for currency appreciation speculation for the region,” said Standard Chartered Middle East economist Steve Brice.
“It still appears that central banks are some way from moving on the currency front,” he said. The UAE is very unlikely to allow its dirham to appreciate this year and unlikely next year, he said.
Investors betting on an appreciation of the dirham pushed the currency to a six-week high against the dollar on Monday after Gulf Arab central bankers failed to revive a monetary union plan.
UAE Central Bank Governor Sultan Nasser Al-Suweidi said on Tuesday he had no immediate plans to change the value of the dirham, dampening speculation.
Keeping their currencies unchanged against the dollar risks fueling inflation as the US currency sank to a record low against the euro on Wednesday. Qatar, for instance, imports 50 percent of its needs from the 13 nations that use the euro, according to Calyon.
The Gulf Arab states that have a peg tend to track US interest rate changes, limiting their ability to fight inflation that has surged as a tripling in oil prices since 2002 fuels economic growth.
Inflation in Qatar, the world’s largest producer of liquefied natural gas, hit a record 14.81 percent in March before falling back to 12.8 percent in June.
The 16 analysts were unanimous that it was unlikely or very unlikely that the six members of the Gulf Cooperation Council (GCC), representing the world’s biggest oil-exporting region, would meet a 2010 deadline to create a single currency.
Three of 15 analysts asked the same question in March thought the 2010 deadline was likely to be met. The six states agreed on Saturday that it would be difficult to meet the deadline, said Saudi Arabian Monetary Agency Governor Hamad Al-Sayyari.