The self-imposed 2010 deadline for the GCC monetary union will pass with the Gulf standing far short of the goals it envisioned at the start of the decade, said Simon Williams, HSBC chief economist, Gulf markets.

“No change in currency regimes or currency values is likely ahead of or shortly after the January 1 deadline,” Williams told an audience of more than 150 senior businessmen in Bahrain.

“Despite this, we think it is premature to write-off the single currency project. The arguments for union remain sufficiently compelling for us to judge that the project will not be allowed to die, particularly now that Saudi Arabia appears to have established a leadership role,” he said.

“We anticipate that the UAE will rejoin the monetary union programme. Even if it does not do so quickly, we do not believe that its absence will derail the broader push towards a single currency,” he said.

A currency union would offer a platform from which the Gulf states could collectively overhaul their monetary policy regimes, including a step away from the dollar-peg.

“No change is likely soon, but we continue to believe that the arguments for depegging are strong and anticipate they will gain traction as the temporarily aligned policy needs of the US and the Gulf diverge,” he said.

Williams said the limited progress made towards the currency union is in part a reflection of the modest immediate economic benefits that monetary union offers a region in which intra-regional trade is modest and currency risk is mitigated by the maintenance of longstanding dollar-pegs.

“Certainly the near-term gains are likely to prove more limited for the Gulf than they were for Europe with the launch of the euro. The political and institutional impetus for monetary union has also been weaker in the Gulf than was the case in Europe,” he said.
“We believe there are straight forward steps that the region could take to show the market and each other that they are determined to press forward with the project,” he said.

The simplest and most high profile step the GCC could take would be to formally establish a shadow Gulf currency, he suggested.

This Gulf equivalent of the ECU that predated the euro would not only symbolise the commitment to union, but could also be used as a unit of account and valuation, he said.

Kuwait’s reversion to a dollar-peg currency regime would also signal a renewed commitment to union.

Drawing the UAE back into a recalibrated monetary union programme would also be beneficial. As tempers cool, it is entirely possible that the UAE will recognise that it has much to lose from standing outside the single currency project, particularly if it wishes to build on its position as the region’s commercial and financial services hub, he said.

Those economies still participating in the monetary union plans, meanwhile, must also be aware that the project would have more credibility and more substance if the UAE – the Gulf’s second largest economy and the most globally integrated – could be drawn back in, added Williams. – TradeArabia News Service