'GCC must be lauded for resisting depeg pressure'

Gulf monetary authorities gained credibility by resisting market pressure to end the peg between their currencies and the US dollar when it plunged by nearly 30 per cent in one year, a prominent banker said yesterday.

Henry Azzam, Chief Executive Officer of Deutsche Bank in the Middle East and North Africa, said the Gulf Co-operation Council (GCC) countries have come under strong pressure by money speculators to unpeg or appreciate their currencies against the ailing dollar but they decided to keep that rate. "We should acknowledge the firm position adopted by the GCC monetary authorities when they refused to end the peg or appreciate their currencies against the US dollar," said Azzam, one of the best-known Arab economists.

"They have firmly resisted speculation campaigns, which have jolted the Gulf currency markets during the past 10 months… had they bowed to these pressures, Gulf states could have encouraged more speculations in the future and fuelled speculation that local currencies could be depreciated after the US dollar starts to recover," Azzam wrote in the London-based Arabic language newspaper, Al Hayat.

Azzam, author of several books on regional economies and other subjects, said GCC states had succeeded in maintaining a stable exchange rate for their currencies over the past 23 years by keeping them pegged to the dollar. "This success has largely lessened exchange rate risks that could have discouraged local and foreign investors. The policy has also encouraged capital inflow and strengthened the credibility of GCC monetary authorities. As a result, speculations have largely receded and this will contribute to reasonable growth in the monetary aggregates in member states," he said.

GCC states have maintained the peg with the dollar for more than two decades, except Kuwait, which opted for a basket of currencies last year.

A sharp decline in the dollar over the past year has given rise to rumours and market speculation that Gulf nations could finally revalue their currencies to counter soaring inflation.

The rumours have prompted most of GCC central banks to repeatedly issue statements ruling out any change in the exchange rate.

Speculation also involved moves by foreign banks to amass deposits with local banks in national currencies, according to official figures.

Balance sheets in many member states showed there was a sharp increase in the foreign liabilities of their banks, while there was a decline in Kuwait.

The bulk of the foreign liabilities were deposits by foreign banks with local banks and most of the increase occurred during the second half of 2007 and in early 2008, when speculation about a revaluation was at its height.

In Saudi Arabia, by far the largest GCC member, there was also a surge in riyal borrowing following rumours about an imminent appreciation in the Kingdom.

"Owing to concerns about a potential revaluation, banks are borrowing in riyals, rather than foreign currency. Riyal funding is being sought from local and international banks and this, combined with foreign banks positioning themselves in the event of a revaluation, has caused commercial bank foreign liabilities to almost double since August," said Brad Bourland, a US chief economist at the Riyadh-based Jadwa Investment company.

Figures by the Saudi Arabian Monetary Agency (Sama) showed the foreign liabilities of the Kingdom's commercial banks jumped to SR138.2 billion (Dh136.8bn) at the end of May from SR69.2bn in August.

Inter-bank liabilities also soared by 76 per cent to nearly SR36.6bn from around SR20.8bn in the same period.

In the UAE, currency speculation had a similar impact, with the foreign liabilities of the country's 52 banks nearly doubling to Dh320.9bn at the end of 2007 from Dh177.6bn at the end of 2006. Deposits of foreign banks with local banks leaped to Dh205.6bn from Dh96.7bn.

In Qatar, Central Bank data showed deposits of foreign banks with Qatari banks shot up to around QR59bn (Dh59.6bn) at the end of March from nearly QR33.6bn in August, an increase of about 75 per cent.

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