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Published on Gold Anti-Trust Action Committee (http://www.gata.org)

Chinese oil company drops bid for Unocal

By cpowell
Created 2005-08-02 07:00

By Dominic Evens
Reuters
via San Diego Union
Tuesday, August 2, 2005

http://www.signonsandiego.com/news/business/20050802-0023-economy- [1]
gulf-currency.html

RIYADH -- China's revaluation of the yuan is fuelling debate in Gulf
Arab states about the wisdom of fixing their currencies to a weak
U.S. dollar while trading links with Asia and Europe continue to
grow.

Oil giant Saudi Arabia and most of its neighbours have pegged their
currencies to the dollar for years, a policy which helped anchor
their young and fragile economies through the turbulence of low crude
prices in the late 1980s and the 1990s.

Officials insist they want to preserve a link that has served them
well in the past -- at least until the planned monetary union of six
Gulf Arab states in 2010 -- and few analysts expect any quick change.

But the weakness in recent years of the dollar and the growth in
Asian and European imports have cut into the purchasing power of the
Gulf countries, whose export earnings from oil are also denominated
in dollars.

The value of Gulf Arab imports from China, which were negligible just
a decade ago, grew last year to $14.5 billion, or 8.5 percent of
total imports.

While record oil prices may mask the impact of costlier goods,
economists say the case for linking to a basket of currencies instead
of the dollar -- just like China -- is gaining ground.

"There is a gathering debate about this," said Daniel Hanna, an
economist with Standard Chartered bank in Dubai.

"The majority of the Gulf trade is with Asia and the European Union.
You can make a case that the currency peg should reflect that better,
especially since China will be their fastest growing partner," he
said.

One vocal advocate of swift change, National Commercial Bank senior
economist Nahed Taher, says Saudi Arabia cannot afford to wait until
2010 to loosen ties between the riyal and the dollar, which have been
fixed since 1987.

Taher has called for a managed float of the riyal against a basket of
currencies, within a 5 percent band, arguing that costlier imports
are partly responsible for pushing annual inflation up to 6 percent
for the last two years.

Other economists dispute Taher's figures, and the Saudi Arabian
Monetary Agency says inflation is less than 1 percent.

But with oil prices set to remain high for the foreseeable future and
the region witnessing its fastest growth since the 1970s oil boom,
policy makers in the Gulf may chafe at the limited room for manoeuvre
which a tight currency peg imposes.

Hanna said Qatar and the United Arab Emirates in particular are
already suffering inflationary pressure which would be easier to
tackle with a more flexible monetary policy.

The six states of the Gulf Cooperation Council -- Saudi Arabia, Oman,
Bahrain, Qatar, Kuwait, and the United Arab Emirates -- control more
than half of global oil reserves.
Supporters of the dollar link say that since oil is priced in
dollars, any change would introduce a new foreign exchange risk for
governments who depend for nearly all their revenues on crude
exports.

Regional politics also make any early move unlikely.

Although most GCC states have informally linked their currencies to
the dollar for years, they only formalised that step as a group in
2002 when Kuwait switched to the dollar from a basket of currencies.

Abandoning their joint position could undermine credibility of the
GCC's goal of monetary union within five years.

"We've just agreed to a formal peg. ... It is too soon after that to
change," said Abdel Aziz Aluwaisheg, director of the GCC
Secretariat's economic integration department.

"There is a realisation that we are losing because of pegging to the
dollar but there is also a feeling that this (reluctance to change so
soon) is a big obstacle -- as well as the issue of foreign exchange
risk."

Aluwaisheg said Gulf officials have discussed informally whether any
change should happen before 2010, but that no formal proposals have
been presented by any of the six countries.

Expressing his personal view, Aluwaisheg said he believed the time
had come to start thinking about changing the peg "even before the
unification of the currency."

"But obviously if it is done, it has to be done jointly. The whole
idea of dollar peg is to have irrevocable cross exchange rates
between the six Gulf currencies before they are unified."

Abandoning the dollar peg, which helped curb double-digit inflation
in Saudi Arabia in the 1980s, for a basket of currencies was not
without risk, he added.
Any change may be a remote prospect for now. Central bank governors
talk openly about the post-2010 options for their unified currency --
either fully or partially floating or pegged to the dollar, the euro
or a basket of currencies.

But they insist the dollar peg stays until then.

Earlier this month, Saudi Arabia's deputy central bank governor
Mohammad Al-Jasser denied a British newspaper report that Gulf
countries were reviewing the dollar link.

Hanna said big changes are unlikely before the new currency is born
but some fine-tuning may occur before then if the dollar slips
further. Kuwait, for example, quietly tweaked the rate on its dinar
in January in a move which drew little attention.

"By no means are we saying that this will change tomorrow," Hanna
said.

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