Rising inflation may pressure Gulf dollar pegs
Soaring oil prices set stage for price rises
Reuters
Published: 00:00 October 21, 2009
Dubai: Reviving growth and a weak dollar are threatening to push up prices in Gulf states, which may put their currency pegs under pressure again in a region that has no flexible monetary policy tool to control inflation.
Price growth slowed sharply in the Gulf this year from the mostly record, double-digit rates seen in 2008 as the global downturn dented income for oil-producing nations, tightened credit and cut food and commodity prices.
Now, however, that trend may be reversing. Oil prices have more than doubled from this year's trough while the dollar is at a 14-month low. Already in Saudi Arabia, the Gulf's biggest economy, annual inflation posted its first increase in four months in September.
As key Gulf economies emerge from the downturn next year, speculation over the viability of dollar pegs — a politically sensitive issue — could grow again. Back in 2007, when similar speculation swirled, investors heavily bought local Gulf currencies offshore against the dollar to bet on a revaluation.
"I am looking for only a pretty modest uptick in inflation but my concern is that price growth may accelerate more significantly," said Simon Williams, chief economist at HSBC in Dubai.
"Most immediately, the weak dollar will boost the local currency cost of imported goods. The dollar peg is also likely to lead to Gulf policy rates being held at exceptionally low levels even when regional economic growth has resumed, adding to the upward pressure on consumer and asset prices."
Kuwait, the world's fourth largest oil exporter, broke ranks with fellow Gulf states in 2007 and dropped the peg to help fight then-soaring inflation.
Speculation on pegs and a weaker dollar can also be damaging for Gulf states, which invest a large chunk of their foreign exchange reserves in US assets.
"The terms of trade will improve once again for the region in 2010, putting strong appreciation pressure on pegged [Gulf] currencies, which will result in high inflation," said Ahmad Akarli, senior economist for Turkey and the Middle East at Goldman Sachs, London.
The IMF sees Gulf states, which also include the UAE, Qatar, Oman and Bahrain, posting robust growth of 5.2 per cent next year after 0.7 per cent in 2009 as crude prices recover.
Average inflation in the region should stand at 3.8 per cent next year, slightly up from 3.7 per cent in 2009 but well down from 10.8 per cent in 2008, according to the IMF.
The dollar hit a fresh 14-month low against major trading partners on Tuesday.
An inflation spike may revive market talk that the Gulf nations could break their fixed exchange rate regimes, which make them keep their interest rates close to the US benchmark.
Soaring oil prices set stage for price rises
Reuters
Published: 00:00 October 21, 2009
Dubai: Reviving growth and a weak dollar are threatening to push up prices in Gulf states, which may put their currency pegs under pressure again in a region that has no flexible monetary policy tool to control inflation.
Price growth slowed sharply in the Gulf this year from the mostly record, double-digit rates seen in 2008 as the global downturn dented income for oil-producing nations, tightened credit and cut food and commodity prices.
Now, however, that trend may be reversing. Oil prices have more than doubled from this year's trough while the dollar is at a 14-month low. Already in Saudi Arabia, the Gulf's biggest economy, annual inflation posted its first increase in four months in September.
As key Gulf economies emerge from the downturn next year, speculation over the viability of dollar pegs — a politically sensitive issue — could grow again. Back in 2007, when similar speculation swirled, investors heavily bought local Gulf currencies offshore against the dollar to bet on a revaluation.
"I am looking for only a pretty modest uptick in inflation but my concern is that price growth may accelerate more significantly," said Simon Williams, chief economist at HSBC in Dubai.
"Most immediately, the weak dollar will boost the local currency cost of imported goods. The dollar peg is also likely to lead to Gulf policy rates being held at exceptionally low levels even when regional economic growth has resumed, adding to the upward pressure on consumer and asset prices."
Kuwait, the world's fourth largest oil exporter, broke ranks with fellow Gulf states in 2007 and dropped the peg to help fight then-soaring inflation.
Speculation on pegs and a weaker dollar can also be damaging for Gulf states, which invest a large chunk of their foreign exchange reserves in US assets.
"The terms of trade will improve once again for the region in 2010, putting strong appreciation pressure on pegged [Gulf] currencies, which will result in high inflation," said Ahmad Akarli, senior economist for Turkey and the Middle East at Goldman Sachs, London.
The IMF sees Gulf states, which also include the UAE, Qatar, Oman and Bahrain, posting robust growth of 5.2 per cent next year after 0.7 per cent in 2009 as crude prices recover.
Average inflation in the region should stand at 3.8 per cent next year, slightly up from 3.7 per cent in 2009 but well down from 10.8 per cent in 2008, according to the IMF.
The dollar hit a fresh 14-month low against major trading partners on Tuesday.
An inflation spike may revive market talk that the Gulf nations could break their fixed exchange rate regimes, which make them keep their interest rates close to the US benchmark.