Saturday, March 03, 2007

Currency revaluation talks

Talk in business circles this past week has been pretty much circled on the recent news articles, particularly in the Khaleej Times, that the GCC countries are going to revalue their currencies by upto 30 percent.

According to Deutsche Bank AG, the UAE dirham and Bahrain dinar would be revalued by between 10 and 15 per cent while Saudi and Oman currencies could be revalued by 25 to 30 per cent. The bank did not rule out the revaluation of Kuwaiti dinar and Qatari riyal, but pointed out that they are estimated to be around fair value.

In its "GCC macro outlook" report, the bank said large current account surpluses in the GCC suggest currencies may have been overly competitive. However, the bank, noting that forex appreciation will not change the US dollar price of oil, said current account surpluses will be fairly unresponsive to any revaluation.

...

According to analysts, the immediate fallout of a dirham revaluation would be that euro-priced products will become cheaper, dampening consumer price inflation. "There would also be a one-off currency gain for the owners of local real estate. But on the other hand, the region would become more expensive for some tourists and the inflow of foreign money might falter as assets would be more expensive."

...

The dollar's slide has driven up the cost of imports in the region, where some countries, such as Kuwait, pay for half their imports in euro and yen. (Link)

A revaluation of the Omani rial would mean that 1 rial would be worth more than its current peg of 2.59 US dollars. In other words, imported goods will become cheaper, particularly US imports, since we would be able to buy more dollars with our rials. On the other hand, the Omani rial would become more expensive, so Omani exports (not that we have many other than petrochemicals which would continue to be sold in dollars) would become more expensive and tourists might be put off by the currency's high value. Instead of getting 385 baisas for each dollar that they exchange, they'd get less. A 10% upwards revaluation would get them 347 baisas only.

If you're an importer, especially a car dealer, a stronger rial would be something you wish for. But if you work in tourism or if you get paid in hard currency, the last thing you want is a rial revaluation. In some industries which are paid exclusively in dollars, a 10% upwards revaluation would entirely wipe out their profit margins.

It's been assumed that one of the reasons Oman opted out of the GCC currency union is because it wants to have a weaker currency to encourage foreign investments, tourism and exports. It makes no sense to me for Oman to revalue the rial. The IMF put immense pressure on Oman to devalue the rial in the mid 90's when oil prices crashed and our government stood fast against that. Has time come for a stronger rial?

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