Time to rethink dollar peg policy
Manama, October 10, 2012
Bahrain needs to rethink having its currency pegged to the US dollar in order to minimise the risks arising from a slowing American economy, said a top banking expert.
Swiss private bank Bank Sarasin's chief investment officer and asset management head Dr Burkhard Varnholt said, "Bahrain has a strong economy and a strong currency that can easily stand on its own."
"By pegging its currency to the dollar, it risks importing the unintended consequences of what cheap money policy has been doing to the US," Varnholt told the Gulf Daily News, our sister publication.
"When you have periods like these, you undermine one of the important mechanisms in capitalism, which is that freely set interest rates allocate capital efficiently," the expert said.
"What we've seen in the last five years has nothing to do with freely set interest rates and has everything to do with government bond market interventions," he added.
Varnholt pointed out that manipulation by central banks had caused investments to take place, which otherwise would not have and that has historically never worked well.
"It should be seen as a risk in Bahrain, when you import this through the currency peg. Bahrain should let its currency float," he added.
The German economist believes that Bahrain's economy will be one of the stronger ones in the GCC region by next year on the back of strong power and oil prices.
"The housing overhang, which was a grave challenge for the Bahraini economy after the big crash worked itself off and is sizeably less felt today and will even balance with housing demand shortly," said Dr Varnholt.
Investors are still complacent about the medium term outlook for oil prices, which he believes would rise to $120 to $130 in the next year and a half.
"The environment remains very favourable for strong power prices and strong oil and gas costs," said the German economist.
"These prove to be helpful forces for the Bahraini economy and if the country can keep up the good steps it has taken over the last 12 months, it will become one of the stronger economies in 2013."
September was the busiest month in recorded history for global bond markets and Bahrain has been playing a critical role through its bond issuances, he added.
"Investors have become more yield-hungry than ever before," said Dr Varnholt.
"Bahrain was just a part and parcel of what has become a global quest for yield, which is ultimately the result of quantitative easing in the US and Europe, which in turn is being exported around the world through pegged currencies."
Bahrain stood out, in relative terms through its offer of a pickup with excellent quality and better risk return ratio than traditional Western long-dated government bonds, he added.-TradeArabia News Service