Author: Gordon Platt






All change: GCC countries hope to adopt a single currency


At the Gulf Cooperation Council (GCC) summit in Oman in December, Gulf Arab leaders approved a monetary union to be implemented by the end of 2009, including the creation of a monetary policy committee and a GCC central bank. The monetary pact paves the way for the introduction in 2010 of a single GCC currency, likely to be called the khaleeji, or “gulf” in Arabic. The Dubai International Financial Center (DIFC) has called for the common GCC currency to be pegged to a basket of currencies, and not just the dollar.

The dollar peg has constrained the monetary policy independence of GCC countries and limited the options of central banks in the region to respond to the global financial crisis and its contagion and spillover effects, according to a report by the DIFC. “The historic GCC monetary union will need to be accompanied by a reassessment of the exchange rate policy that links the currencies of GCC member states to the dollar,” says Nasser Al Saidi, chief economist of the DIFC Authority. The new common currency should be linked to a basket of currencies weighted 45% in dollars, 30% in euros, 20% in yen and 5% in British pounds, the DIFC says.

Dubai’s banks face major challenges as a result of falling oil prices, tighter liquidity, a slowing economy, tumbling stock prices and declining real estate prices, according to US ratings agencies. Moody’s Investors Service is worried about loans to “opportunistic” property developers and says credit conditions are likely to worsen. Standard & Poor’s says it expects a major slowdown in economic growth and deterioration in asset quality and profitability.

The delay announced last month in building a one-kilometer-tall skyscraper, the Nakheel Tower, was a blow to Dubai’s self-confidence. This followed the termination in December of the construction contract for the Trump International Hotel & Tower on one of Dubai’s three palm-tree-shaped islands.

The collapse in December of Dow Chemical’s $17 billion Kuwait polyethylene venture as well as Moody’s recent downgrade of its sovereign ratings outlook for Bahrain from stable to negative have taken more wind out of the region’s sails.

Gordon Platt