Will the UAE depeg?


UAE Vice-President and Prime Minister Sheikh Mohammed bin Rashid al-Maktoum has confirmed the federation is considering removing the dirham’s peg to the US dollar, while saying he is confident that inflation in the federation will solve itself.

I’ll take that as a “maybe“.

How about Bahrain?

Bahrain’s crown prince said on Saturday that even talking about revaluing the local currency against the dollar was irresponsible and the country had no plans to adjust the value of the dinar.

I’ll take that as “no effin’ chance boyo“!

So how are your purchases doing in the ever increasing – and completely obfuscated – inflationary economy in Bahrain? They say that even dog food is up by BD2 per bag and it’s set to rise again next week, so go and stock up!

  • ammaro
    5 April 2008

    in terms of breaking the dollar peg, the gulf countries are supposed to act together. This was generally agreed (because they’re trying to ensure some sort of equality between their currencies to later move to a unified currency). Kuwait decides to tell everyone to go f%%% themselves and unpeg. The other countries are still pegged though, and were very seriously considering it end of last year. the s#it hit the fan when investors started speculating and caused a bit of a wreck in the currency markets, so the govts decided to put it all on hold.

    If an unpeg is decided, one of the heavyweights would be making the decision (ie, either Saudi or UAE), and the other countries would follow suit. Bahrain can’t act on it’s own, no frickin way; it would just follow anything saudi does.

    Anyhow, to peg or unpeg? As a short term solution, we should. As a long term solution, we don’t really need it; the dollar will bounce back after 3 or 4 years to normal levels. However, when you think about it, we’re trying to have a GCC currency so a long term solution is not really necessary, is it?

    Anyway, the whole delay in unpegging also has political pressure tied to it. no one’s saying it out, but america is grabbing us by the balls. if the GCC unpeg, we can seriously screw their currency over a lot worse than it already is (we’re holding around 1 trillion dollars in our reserves, signalling unpegging would mean the value of those dollars goes pfft brining down the dollar even more)

  • Rebel Without A Clue
    5 April 2008

    Ammaro, while i agree with some of the things that you say, possibly the alternative would be to revalue the currency while still keeping the USD peg.
    The GCC is now in a situation where Inflation is at over 10% and Interest rates are at 2.5% rendering our money worthless.
    While Just mearly Revaluing and keeping the USD peg would not help our situation due to the differentals in inflation and interest rates it would help in keeping the import prices down….

  • ammaro
    5 April 2008

    i mentioned that previously as a possible solution, and it has also been suggested between the GCC members. In reality, looking at the inflation rates and the devaluation of our currency over the past few years, a revaluation of around 20-25% would be ideal, and is what is needed. However, if the countries do decide to revalue, don’t expect to see more than 7-8% (especially if you have Saudi Arabia making the decision, they’re pretty conservative when it comes to this issue, for obvious reasons), which isn’t really fixing the problem.

  • Carsten Agger
    5 April 2008

    Maybe Bahrain and the other Gulf countries should consider pegging to the euro instead of USD; the euro is stable, at least.

  • Abu Arron
    6 April 2008

    Hmm. What underpins the world economy? What does the Middle East trade in? Why does the West (predominantly USA) care a flying **** what happens in the Middle East? Yep, OIL. What currency is oil traded in globally? Yep, the good ol’ greenback.

    Certainly depegging would allow a (much needed) revaluation of the GCC currencies, but planning the various national budgets would require some serious (new) skills.

    At the moment it’s predominantly “x number of barrels sold = y number of $$ coming in. y number of $$ = z number of KWD/SAR/AED/etc”. Easy peasy, but what would the financial planners do when they run out of fingers and toes?

  • Sadek
    6 April 2008

    All fine and good with whats being said, but the reality is that the dollars depreciation is a relatively minor factor in the inflationary spiral we find ourselves here.
    As economies we have neither the fiscal or monetary tools to manage our economies.
    You don’t have to be Milton Friedman to realise that with all the money thats is being spent by governments’ in the GCC is the primary cause of this inflation, and that it is largely demand driven. As you increase money supply, you debase the value of money and also increase demand. As they say in the trade; we do not have many tools to sterilise the growth in money supply.
    Another factor is that the rest of the world is also going through an inflationary spiral, partly because everybody was happy to see the US pumping dollars into the global system, and partly because the standards of living in a number of economies (China and India)have gone up, driving agricultural commodity prices through the roof (we still haven’t seen anything yet in terms of price inflation). Finally the stupidity of converting staples as corn and soya to eco-fuels is having an impact.
    The simplistic suggestions of one-off revaluations will not solve anything, in fact it would likely increase the flows of money further.
    I would agree with Ammaro that the dollar is probably now reaching a bottom; it begs the question though that if the dollar bounces back will the same readers be clamouring for a devaluation?

Who’s gonna take it?