Gulf rulers eye FX union as crisis tensions mount
Dubai, December 24, 2008
Gulf Arab leaders, meeting next week to sign key monetary union accords, are likely to be sidetracked by the urgent need to restore investor confidence amid an oil price slump and stock market rout.
Rulers of Saudi Arabia, Kuwait and four other states in the oil-exporting Gulf should emerge from the December 29-30 annual summit with a monetary union pact and the framework for a Gulf central bank as they dash to meet a self-imposed 2010 deadline.
They may also come to a compromise on the location of the regional central bank, one of a series of political roadblocks that had derailed the single currency project for years.
But the six mostly autocratic leaders will gather in Omani capital Muscat facing more immediate concerns - oil prices have collapsed, the credit crunch is derailing expansion projects and Gulf bourses have slumped as much as 73 per cent this year.
Economists said they would look for signs the Gulf Co-operation Council (GCC) was prepared to work together more explicitly to face a crisis that they have, so far, responded to mainly through independent policy decisions.
"What concerns them right now is the impact of the crisis on the GCC. That's number 1," said John Sfakianakis, chief economist at SABB bank, HSBC's Saudi affiliate, in Riyadh.
"The crisis is teaching them an important lesson - emerging market currencies have been hit hard and they realise that the peg is not that workable. It does make sense to have a common currency and it is better to be cohesive than go it alone."
The backdrop of the summit has changed radically from a year ago, when the weak dollar and soaring inflation was mounting pressure on the Gulf to scrap dollar-pegged currency policy.
Currency reform pressures have since died entirely as the dollar rebounded and Gulf policymakers shifted their attention from fighting inflation to facing a global financial meltdown that has brought an end to their six-year economic boom.
The GCC, which also includes the United Arab Emirates, Qatar, Bahrain and Oman, is set for a rapid deceleration of economic growth next year.
Saudi Arabia is already projecting a 2009 budget deficit - its first since 2002 - and Dubai's building boom has begun to unravel, leading to scores of job losses. The negative sentiment has sent Gulf stock markets spiralling downward.
The oil price slump and its effect on the region's economies was on the agenda, Oman's foreign affairs minister said in newspaper remarks on Wednesday.
"For these economies, restoring people's confidence is the key," said Paul Gamble, head of research at Riyadh-based Jadwa Investment. "The markets do not reflect that this region is pretty well-positioned to weather the economic downturn, this is the key challenge the leaders have to face."
Whatever they may decide behind closed doors in Muscat next week, their communique is unlikely to make many definitive statements on how they will tackle the crisis, economists said.
Instead, Gulf rulers are likely to focus on how they will move ahead with monetary union, overcome hurdles to implement customs union, discuss the status of free trade talks and study the feasibility of a $14 billion regional railway.
Last week, the top GCC official said the monetary union would "see the light" at the summit. GCC secretary-general Abdul Rahman al-Attiyah added this week that the Gulf was on track to launch the monetary council, a precursor to the regional central bank, in 2009.
A lack of political will had pushed the single currency plan - unveiled in 2001 but the subject of talks for decades - off the rails; Oman declared in 2006 it would not join just months before Kuwait broke ranks with its neighbours in May, 2007 and dropped its dinar's link to the weak dollar.
"The GCC needs to define the institutional framework of the Gulf central bank," said Fabio Scacciavillani, an economist<