Currency Sovereignty


Economic News

22 Jul 2010
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OBG talks to Simon Williams, Chief Economist, Gulf Markets, HSBC

Sovereign wealth funds (SWFs) have come under scrutiny in both America as well as in Europe. Why are regulators so wary of them?

Williams: A lot has been learned since the P&O Ports takeover episode. I think that the Gulf SWFs have made it very clear to US, European, UK and emerging markets that they are good quality, long-term investors that are making sound decisions on commercial grounds.

The fact that they are long-term investors and that they have a much longer time horizon in terms of their outlook and are more fundamental and value oriented than hedge funds, for example, make them the kind of investors that developed markets are now seeking. I think the anxiety is largely over, certainly with regard to SWFs in the Gulf.

Looking at the economy from a developmental perspective, when should the UAE consider the introduction of direct taxation?

Williams: I do not see direct taxation on the agenda. The preparation work for a value-added tax (VAT) has been completed and I think there is some hesitation in bringing the tax into effect until inflation is stabilised. As oil revenues ease, so will inflation, and it will be a more attractive environment to introduce a VAT. With that said, I do not think it will happen in 2009, and it is more probable in 2010.

As the international lending markets have all but dried up, how are both regional developers and buyers going to obtain necessary financing?

Williams: It is a lot tougher than it was but we have to keep this in context. This is not a Dubai problem or a UAE problem, this is a global phenomenon. Over the past four or five years, credit growth has been running at 30-35% a year and that is roughly three and a half to four times the medium-term average. It was inevitable there was going to be a significant slowdown in credit growth. It is going to hit the region particularly hard because the squeeze on local funding is taking place at the same time as access to the global debt and equity markets has become much more difficult to attain and more costly than was the case in recent years.

Looking at 2009, I expect to see the pace of lending slowing down substantially. By rationing the volume of credit and by increasing the cost, we will see lenders being a lot more picky on the projects they choose to fund. We will also see borrowers making markedly different economic decisions.
Developers will still be able to access funds for worthy projects as well as for priority projects and reliable borrowers will also be able to access financing, albeit at a far higher price than before.

How will the dollar peg impact the economy of the UAE into the future, and how will the dollar continue to play a role in the UAE's economy?

Williams: I am not convinced that 2008's dollar rally will persist through 2009. The problems the US economy is facing just look too severe. I think you are likely to see some of the gains that the dollar has made begin to reverse, and when it does you will notice that concerns about the dollar peg in the Gulf will start to re-emerge.

The case for an update to the way the Gulf manages its currency is strong. It is not just about the value of the dollar. The Gulf's economy is now developed enough to benefit from the control of its own monetary affairs. It necessitates a currency that trades on the Gulf's fundamentals and not solely on the fundamentals of the US.

It also requires an interest rate that reflects its own needs and not those of the US. There are fiscal consequences as well, but a flexible currency regime would likely reduce some of the volatility associated with dollar-denominated fiscal revenues that come in the form of oil. A flexible currency regime would bring about more stability and not less.

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