[NYTr] Booming Economy: Gulf inflation rises, Dollar abandoned

[All the News That Doesn't Fit]

CNN - Oct 11, 2007
http://www.cnn.com/2007/BUSINESS/10/11/gulf.inflation/index.html

Dollar weakens, Gulf inflation rises

(CNN) -- The declining dollar, surging oil prices, and exploding growth
across the Persian Gulf are causing inflation levels to rise. Kuwait
has already abandoned the dollar. And some analysts say the rest of the
GCC may have to do the same to fight inflation. But do the Gulf banks
agree? And how far do they think switching to a basket of currencies
will bring down prices?

 Qatar and the U.A.E. registered the highest inflation levels at 10
percent this week. In Oman, inflation was running at almost 4 per cent
and 2.8 percent in Saudi Arabia.

Strong growth across the region, fueled by surges in oil prices have
been a major factor. Supply has been struggling to keep up with demand
in the growing economy, causing bottlenecks in supply which drives
inflation.

Ahmed El Shall, CFO of Dubai Bank said the building boom in the U.A.E.
is another "primary cause" of inflation. Rents are on the rise, causing
other prices to climb. "If you consider that 36 percent of the
inflation measure is made up of housing, you realize the inflation rate
for the U.A.E. is 10 percent and above simply because rents have been
increasing above 10 percent per annum," he told CNN.

But the other factor at play has been imported inflation via a weak
U.S. dollar.

Last week, in response to the sub-prime mortgage crisis, the U.S.
Federal Reserve cut interest rates by 0.5 point to 4.75 percent in
order to save the nation's economy from a slow down.

Because currencies in the Gulf Co-operation Council region including
Saudi Arabia, the U.A.E., Qatar, Bahrain and Oman are pegged to the
dollar, their exchange rates also decline. This means prices of imports
from non-dollar areas have increased, causing inflation.

With currencies pegged to the dollar, banks in the region must also
follow the Fed's lead with their interest rates. This is another driver
for inflation because lower rates drive investment. But to soften the
blow, U.A.E. and Qatar kept rate cuts to a minimum and Saudi Arabia and
Oman decided not to budge at all.

Rising prices are beginning to take their toll across the region. Dubai
is now one of the most expensive cities in the world. Expats, with
investments and bills to pay at home, are especially feeling the pinch
of a weak exchange rate.

As prices rise, the debate intensifies about whether countries in the
GCC should review their dollar pegs and link instead to a basket of
currencies.

As analysts argue, when these countries first decided to peg to the
dollar, oil prices were low and the U.S. currency strong. Today the
opposite is true. Fitting to a basket, they say, would better reflect
the GCC's modern economic situation.

Kuwait was the first country in the GCC to jump ship. In May it ditched
the dinar's peg and moved to a basket of currencies.

But, as Shall told CNN, the Kuwait revaluation is yet to show an
effect. "My understanding is that so far it hasn't really shown any
improvement in inflation. To the contrary, it suffers in the exact same
way Qatar and the U.A.E. suffer."

Qatar's central bank governor, Abdullah Al-Thani, told reporters and
bankers last month that they were taking measures to control prices and
rents to decrease inflation. But the dollar peg would remain, he said.

Saudi Arabia's refusal to cut interest rates with the Federal Reserve
has prompted more speculation that it was preparing to break its dollar
currency peg.

But the Kingdom has continued to deny this. Saudi bank, SABB, also
"firmly" believes the Saudi riyal will not be revalued. "An expected
change in the currency regime will take place only if the dollar
weakens at an alarming rate and is sustained over the medium term," it
said in a recent report.

Excessive speculation about devaluation, "could cause observers to
overlook the GCC growth story," said the report. "The Kingdom's
competitive advantage, in petrochemical exports for example, is not
being affected, as most are priced in dollars."