SINGAPORE: Gulf Arab central bankers said yesterday they had taken enough measures for now to shore up their economies and were cautiously optimistic that the worst of the economic downturn was over as oil prices recover.
The central bank governor of Saudi Arabia also pledged continued support for the riyal’s peg to the US dollar, as the Gulf region moves closer to monetary union.
Central banks and governments in Gulf have slashed interest rates, distributed emergency funds to banks and raised public spending to bolster their economies as the oil price slump and financial turmoil brought a regional economic boom to a close.
“We see oil prices recovering from the bottom that we have seen, because market players feel that maybe, maybe, the worst is behind us in terms of the global economic contraction,” said Saudi Arabian Monetary Agency Gov. Muhammed Al-Jasser.
Oil prices, which fell to the mid-$30 range earlier this year, rose toward $58 a barrel yesterday. States in the world’s biggest oil-exporting region rely heavily on revenues generated from crude oil and natural gas exports.
“Our reserves are still very high, we did not get into any financial problems. We are still very comfortable and we will not need to issue any debt instruments at this time,” Al-Jasser told reporters on the sidelines of a conference.
Al-Jasser said the Kingdom’s interest rates were at an “appropriate level” for now after the central bank reduced its benchmark rate by more than half to 2 percent since October.
His comments were echoed by governors of Qatar and Bahrain, the former saying he would hold interest rates steady for now and the latter adding that banks had begun to resume lending.
Gulf banks have been cautious about extending new loans after they took deep provisions to guard against an expected rise in non-performing loans and wrote down investments.
“There have been a lot of improvements lately,” Bahraini Central Bank Gov. Rasheed Al-Maraj said. “There is a small growth in credit compared to last year.”
The United Arab Emirates, hard hit by a real estate slump in the emirate of Dubai, had also seen an improvement in banking sector liquidity, said Gov. Sultan Nasser Al-Suweidi.
Some economists have warned the UAE risks facing deflation this year due to a sharp drop in real estate prices, which fell 41 percent in Dubai in the first quarter compared with the fourth quarter, property consultants Colliers said last month.
“The economy will shrink this year but it will definitely grow in 2010,” Suweidi said. “There is no pressure on inflation, so it makes sense to keep expansionary monetary policy.”
The four Gulf oil exporters and Kuwait are preparing for a single currency sometime after 2010 — an initial deadline that was scrapped earlier this year. Gulf states had pledged to keep their currencies fixed to the dollar until monetary union, but Kuwait broke that pact in 2007 when it began tracking its dinar against a currency basket.
At the time, the then-weak dollar had triggered a wave of imported inflationary pressure in the Gulf, where economies were booming due to a six-year rally in oil prices.
This pressure has eased with the dollar’s recent strength, but a Qatari central bank official warned this week any future weakness in the dollar could reignite the dollar peg debate.
“It has served us well, it still is serving us well,” Al-Jasser said, his colleagues in the UAE and Bahrain also throwing their support behind fixed exchange rates.
Gulf leaders have given renewed momentum to single currency, approving a monetary union deal in December and deciding this week to base the joint central bank in Riyadh.
Suweidi said the region still needed to forge economic integration to pave the way for a single currency.
“It will not work unless we have the mechanism for the common market working fairly well,” Suweidi said.
A Gulf monetary council, the precursor to the central bank, would decide on a new timetable for rolling out the currency, which some policymakers have said could be pegged to the US dollar at the start before possibly being freely floated.
“Once these laws have been ratified, the monetary council will start operating and all of the rest of the issues will have to be resolved and taken care of by the council,” Al-Jasser said.
