Delinking the dirham from the dollar is currently ruled out

[rexdmx]

Fitch assigns Abu Dhabi currency ratings of 'AA'
Staff Report
Published: July 03, 2007, 00:42


Dubai: Credit rating agency Fitch Ratings yesterday assigned the Emirate of Abu Dhabi foreign currency and local currency Issuer Default ratings ("IDR") of 'AA' with a stable outlook.

A short-term foreign currency rating of 'F1+' has also been assigned.

"The 'AA' rating reflects Abu Dhabi's track record of economic and political stability, exceptionally strong public and external balance sheets as well as its huge per capita hydrocarbon endowment that underpins one of the highest incomes per head of any Fitch-rated sovereign," said Richard Fox, Head of Fitch's Middle East and Africa Sovereign rating team," Fitch said in a statement.


Although dependence on oil revenues is a weakness, this is mitigated by the investment income from the foreign assets managed by the Abu Dhabi Investment Authority (ADIA), the stock of which dwarfs annual budget expenditures.

The risk of domestic political and social upheaval is judged to be minimal.

[rexdmx]

Dollar crash hits exchange rate
By Babu Das Augustine, Banking Editor
Published: July 03, 2007, 20:36


Dubai: The dollar hit a 26-year low against the sterling on Tuesday with euro nearing an all time low, implying further downward pressure on the purchasing power of the dirham and other GCC currencies that are pegged to the dollar.

"We expect the dollar to weaken in the near term that could apply further pressure on the regional currencies.

"While we expect Kuwaiti dinar to appreciate by 0.35 per cent in the third quarter, we do not anticipate other GCC countries including the UAE to make any change in their exchange rates in the short term," said Steve Brice, an economist with Standard Chartered Bank.

The dollar reported broad weakness against most currencies yesterday as the euro hit a lifetime peak against yen.


While the dollar came under pressure from the concerns about the US sub prime mortgage market, reports on softening of inflation and lower expectations on interest rate also weighed in on the greenback.

Dirham and other Gulf currencies have been on perennial slide along with dollar against euro, sterling and a host of leading Asian currencies.

In response to the declining dollar and mounting inflation, on May 19, Kuwait dropped its currency peg against dollar in favour of broad based peg against a basket of currencies.

Despite the growing public demand for a revaluation dirham, the UAE central bank and the government have repeatedly affirmed that the country will stick to the peg as part of its commitment to the GCC common currency.

In the fresh round dollar's decline, the sterling stood at $2.0151 yesterday, after hitting a 26-year peak of $2.0197 in early trading hours.

The euro was trading at $1.3611, nearing the all time record high it touched at $1.3682 on April 27, up from $1.20 a year ago and as little as 83 cents in October 2000, when its rally against the dollar began.

A steady rise in the value of sterling, euro and Asian currencies would mean a corresponding increase in import costs.

While the Gulf central banks insist that they are not yet ready to give up the peg, consumers are paying a heavy price to live with the imported inflation.

Sterling, euro outlook

Analysts said yesterday that the UK and Europe are still in on the credit-tightening mode and interest rates are inclined northwards.

"Higher interest rate expectations are obviously a key factor behind the strengthening of Sterling. The failed terror strikes and overall positive sentiment that the possibility of future strikes are lower due to the arrests have also helped the near term outlook," Brice said.

Thursday's Bank of England board meeting is expected to increase interest rates lifted 25 basis points to 5.75 per cent, which would be half a percentage point higher than US rates.

The European Central Bank is seen keeping rates steady at 4 per cent at a policy meeting this week but is expected to lift rates twice more this year.

[rexdmx]

Gulf states unruffled by dollar's weakness
Reuters
Published: July 07, 2007, 00:04


Dubai: Most Gulf central banks look set to ride out the latest spell of US dollar weakness, although Kuwait could be tempted to hasten a widely anticipated second revaluation this year to contain imported inflation.

Import costs are not a big driver of inflation in other Gulf oil producers with fixed exchange rates, and the dollar's slide to near record lows against the euro has not been steep enough for central banks to risk their credibility on currency policy.

Kuwait broke ranks with its neighbours in the world's largest energy exporting region, ditching a dollar peg in May to contain the impact of rising import costs on inflation.

Other Gulf countries have kept dollar pegs since the 1980s, but pressure to change has increased as their currencies have weakened despite vast current account surpluses and double-digit growth rates.

But with limited impact on their economies of last week's dollar decline and in the absence of a further steep drop, Gulf countries are reluctant to react to what they probably con-sider short-term fluct-uations.

"They want to take their time with any such decision," said Steve Brice, regional head of research at Standard Chartered bank. "With the dollar moving within five to 10 per cent they are unlikely to change their policy. They look at this on a structural level."

While Gulf central bank governors contend with increased pressure from importers of goods from Europe or Japan during bouts of dollar weakness, most of their inflation problem is domestically driven.

Standard Chartered estimates that about 34 per cent of imports to both the UAE and Kuwait come from the European Union, and this added to inflation as the dollar fell to a record low against the euro in April.

Capacity constraints

But capacity constraints as Gulf economies grow on the back of a near tripling of oil prices since 2002 are the main drivers of inflation, which surged to 15 per cent in Qatar in the year to March.

Both Qatar and the UAE, where inflation was 9.3 per cent in 2006, have blamed inflation on rents as an influx of expatriate workers strains housing supply.

"The dollar's fall will dismay the central banks but it won't lead to panic," said Simon Williams, econ-omist at HSBC. "They know rapid domestic demand growth is the main inflation driver, not the weakness of the currency."

The dollar's fall is also not entirely negative as it helps the region develop its non-oil exports, contributing to economic div-ersification.

"Exports of non-oil goods and services are a majority of the UAE's exports and a key part of its growth strategy," Williams said.

"The UAE would like the dirham to be stronger but there is some benefit to these sectors from a weaker currency."

Kuwait's non-oil and gas exports, on the other hand, are only about four per cent of total exports and in part explain Kuwait's ability to revalue without much negative effect.

Kuwait's battle with speculators ahead of its revaluation could also dissuade other central banks from following suit.

Speculators

The bank was forced to slash interest rates despite high inflation to stem massive dinar purchases from speculators in the months before it revalued.

Preventing speculators from making profits too quickly could in part explain the small initial revaluation from Kuwait - around 0.37 per cent - and the lack of dinar appreciation since then.

UAE Central Bank governor Sultan Nasser Al Suwaidi said last month the UAE dirham's peg to the dollar, unchanged for a decade, was an anchor of stability for the economy.

"The level of attention Gulf currencies get now is pretty modest, but that would change if they were to revalue once," said Williams.

"The markets would conclude that if they change once there would be other adjustments."

Al Suwaidi first raised the possibility of Gulf revaluations in January after the euro had broken $1.30. Speculation about a revaluation grew as the dollar fell in April to a record low.

With the dollar not yet dipping below its April level, Gulf central banks still likely feel the greenback is at tolerable levels.

"We've been at this level before so this is not new to them," said Caroline Grady, economist at Deutsche Bank in London. "I don't think they will be worried about a couple of days but if the dollar weakens much more than we expect it might change the story in terms of speeding up any revaluation."

[rexdmx]

Rise of tolerance for currency appreciation
By Kevin Yao, Reuters
Published: July 07, 2007, 00:04


Rising asset prices and the mounting cost of foreign exchange intervention are prompting Asian policy makers to step back from markets, setting the stage for a faster rise in regional currencies.

In a region that routinely curbs currency strength to help underpin exports, official concerns about higher exchange rates have been further soothed by the resilience of overseas sales this year despite a slowdown in the US.

Most Asian countries tightly manage their currencies while trying to run an independent monetary policy.

This can create a conflict. Tighter conditions can attract capital, pressuring the currency to rise, which becomes costly to control. This is known as the impossible trinity.

"They have seen the limits of the system, though they are not going to end intervention completely by any means," said Marshall Gittler, chief Asia strategist at Deutsche Bank Private Wealth Management.

Underlining the tolerance for higher exchange rates, Malaysia's trade minister Rafidah Aziz said last week that a firm ringgit had not hurt the country's exports, and local firms are taking the currency's strength in their stride.

Indonesian officials have said they were comfortable with a stronger rupiah.

India's central bank admitted in its April policy review that "dealing with the impossible trinity of fixed exchange rates, open capital accounts and discretion in monetary policy had become more complex than before".

For that reason, it allowed the rupee to jump 10 per cent versus the dollar in about three months from early March to achieve monetary policy control to fight against inflation.

The rupee is the best performer in Asia so far this year, although with inflation easing, India's central bank may well tighten its currency reins once again, analysts say.

Tim Condon, head of Asia research at ING, said in theory it's impossible to manage the so-called impossible trinity, although Asian countries have tried.

"But it's becoming more and more difficult in a globalised world," he said.

Struggling

Morgan Stanley says India, Malaysia, Singapore, the Philippines and Thailand are all struggling to check their currencies while controlling monetary policy with relatively open capital accounts.

In theory, fixing an exchange rate alongside an independent monetary policy can only work with capital controls.

Foreign exchange reserves in Asia ex-Japan have doubled from 2003 to $2.4 trillion as central banks limited currency gains, but the costs of piling up such reserves are mounting.

"The costs of reserve accumulation for a number of countries have reached levels which would appear difficult to sustain," HSBC currency strategist Rich-ard Yetsenga said. He estimated the cost of accumulating foreign exchange reserves had reached around four per cent gross domestic product in India, Malay-sia, Philippines, Thailand and Singapore. Capital is flowing into the region's high-flying stock markets while property prices are also booming. This raises concerns about future inflation, prompting Asia's more tolerant policy makers to tighten monetary conditions by letting currencies rally.

Analysts believe the Indonesian rupiah and Malaysian ringgit would benefit from the new policy tolerance.

A noticeable exception to the more tolerant currency attitude is South Korea, where officials have voiced repeated concerns about the won's strength against the dollar and particularly the yen, the currency of export rival Japan.

In recent months, the won has hit its highest levels since the Asian financial crisis.

[glover]

thanks. the Reuters story above, Gulf States Unruffled by Dollar's Weakness, is the best reporting i read so far on this issue.

[rexdmx]

yea i know ...seems like they learnt from their financial crisis a decade ago eh??

although glover you must admit, the trade offs are kinda complicated..
simplified it is like this (although you already know it) how do you decide between the following

1. if you currency is less stronger, it means your exports are cheaper and will be bought by more countries yea?this will bring more cash to the economy but
2. if you place a strong monetary position in place then your currency becomes stronger and rises in value...your exports becomes more expensive but since the currency is stronger, your people can buy more goods abroad plus people put more money and there is an inflow of capital in your country

...who else can put something in??

[luv2bebrown]

well ideally, the UAE would want to increase its exports and decrease its imports. a weaker currency would make its non-oil exports cheaper and therefore more attractive to international customers, and a weaker currency would make imports more expensive and therefore less attractive.

however, certain imports are absolutely necessary making the weaker currency an obvious con. additionally, for one of the UAE's main exports - OIL (which is considered a vital resource which international customers will continue to buy at virtually any foreseeable price), a weaker currency means the UAE's is now getting less money for its oil exports.

its up to the UAE's economists to determine whether the country benefits more from selling oil at a higher price with the absence of imported inflation, or from selling more of its non-oil exports at the expense of imported inflation and oil revenue.

personally, i think the weaker currency is great since it will allow the UAE's non-oil export industries to develop. if imported inflation does not really account for much of the inflation - i think the country stands to gain from developing its non-oil industries especially since oil prices are already pretty high.

[rexdmx]

Originally Posted by luv2bebrown

if imported inflation does not really account for much of the inflation - i think the country stands to gain from developing its non-oil industries especially since oil prices are already pretty high.

so a big question now is if...i think it was in the previous posts...
sameerl and glover which one of you have access to uae's latest trading data..?
what are its biggest source of imports? exports?
do we have a pie chart showing all the data?

where are those boys

[sameerl]

The main problem isnt the data (although various sources seem to contradict the pricing information that the government has released), but rather the interpretation of the data and what the benefits are for the two courses of action that the government has at its disposal (to revalue or not). Here are the major issues:

1) Glover and various others believe that the government is correct to not revalue because the benefits derived are trivial (imported inflation is not that much of a problem). This is a perfectly legitimate point of view, especially in light of the fact that the county has kept the exchange rate fixed since its independance and during this time has gone through various cycles of dollar appreciation as well as depreciation, and the currency stability has played a net positive role in its development.

2) Dirham revaluation implies not only the entry of speculators into the currency market (thereby opening up another area where the government will have to actively manage the markets) but also brings in uncertainity into the picture with regards to its oil earnings, as well as tourism revenue. In a non tax based economy (atleast non taxabable from the point of view fo diretc taxation), the loss in revenue is not made up from doemstic earning sources, and will probably compel the government run companies to actually decrease their prices (emirates airlines tickets, hotel room prices) so as to keep them dollar price constant and not ward off tourists. So the view from government run circles is that there is am actual negative revenue component in the picture that is not garnereing any press attention.

Now if you look at the government stats you see imported inflation of food and other staples running at approx 6-6.5%, which is high, but nothing even close to what the newspapers and certain economists are claiming. For points of comparison, if you look at the US inflation numbers (which include food and energy), inflation is running at approx 5% or slightly higher. So the increase in prices can be argued as a global aggregate phenomena, rather than a localized or regionalized one. In this regard, any revaluation will only have a one time effect.

What critics (including myself) are arguing is that the data does not suppport the above. But again, we've been through this on this forum time and again. (I do have trade stats of the UAE, for the past 30 years from the govt, as well as from international private sources, as well as of the other countries in the region. We use them for our regression models - a highly boring exercise)

(I hope i have not misrepresented Glover's take on the above).

[rexdmx]

Originally Posted by sameerl

What critics (including myself) are arguing is that the data does not suppport the above. But again, we've been through this on this forum time and again. (I do have trade stats of the UAE, for the past 30 years from the govt, as well as from international private sources, as well as of the other countries in the region. We use them for our regression models - a highly boring exercise)

(I hope i have not misrepresented Glover's take on the above).

is it possible to post the data or is it confidential??
how to we correctly interprete the data then for non professionals?

what are regression models? i heard about them in stats class...there were boring

[glover]

sameer,

as always, great analysis. just want to add that i also believe that when you have a double digit growth the like the UAE had in the last few years, high inflation is inevitable, whether your currency is pegged to a depreciating asset or not. That's something you also have to take into consideration in your analysis, because as you said, data is always open to interpretation. but historically, booming economies have almost always suffered from high inflation for some reason or another, and the UAE is no exception today. sometimes we get so engulfed with the minutia of data and lose perspective of the overall picture.

[sameerl]

rexdmx:

The data is not confidential at all. Can be donloaded from a number of sources, including the ded website, the imf handbook of the wold, the eiu data sets etc. Some of these sites charge for the info, and thats why i cant post it on the website. It would be an endless list of numbers anyways.

Glover:

Capacity constraint definitely plays a significant role in the issue. I totally agree with you there. Capacity botllenecks seem to compound price pressure that are building up in the economy with demand running away. What you and I disagree on is the relative importance of capacity bottlenecks vis a vis the dollar effect.

[rexdmx]

Analysts forecast sharp rise in prices of imported food
By Ahmed A. Elewa, Staff Reporter
Published: July 11, 2007, 00:02


Abu Dhabi: The prices of imported foodstuffs are under tremendous pressure and are expected to rise sharply in the near future, according to analysts.

Click here for selected commodities prices (pdf)

The weaker dollar, near-peak oil prices, as well as faltering application of the rent cap in the emirate of Abu Dhabi may take their toll on retail prices, says Steve Brice, regional head of research at Standard Chartered Bank.

With government-owned retail outlets offering the highest rates in the country (see table), the private sector can be tempted to increase prices further, pushing the inflation even higher than forecast.

Standard Chartered Bank estimates that inflation will be in the vicinity of 7.3 per cent in 2007.

"However if the dollar falls substantially and the petrol pump rates increase, we will surely have to revise our forecast," Brice said.

The euro's peak now stands at $1.38. However, if the euro reaches $1.40 or $1.45, the external effect on domestic inflation will intensify, pushing prices to record levels, he added.

Most expensive

Abu Dhabi ranks among the most expensive emirates according to the weekly foodstuffs price list issued by the ministry of economy, reflecting the faltering property market control, as well as the remarkable economic growth rate recorded by the emirate.

Abu Dhabi's share in the overall UAE's nominal gross domestic production (GDP) has risen from 59 per cent in 2005 to 60 per cent in 2006, according to Ministry of Economy's data, while Dubai's relative share declined from 28.9 per cent to 28.2 per cent.

[sameerl]

Kuwait revalued again. By 0.44%.

[rexdmx]

whoa!!
source??

Originally Posted by sameerl

Kuwait revalued again. By 0.44%.

[rexdmx]

US subprime fears deal major blow to dollar
Special to Gulf News
Published: July 14, 2007, 23:31


Last week was marked by the dollar touching a life-time low against the euro and a fresh 26-year low against sterling on concerns about the health of the US subprime mortgage market and that the malady could adversely affect the wider US economy.

In the coming week, the markets will closely watch the minutes of the last Bank of England meeting and the FOMC meeting, in addition to Germany's ZEW index survey and US Treasury International Capital flows.

Euro

The week commenced with the dollar broadly steady against the euro and other major currencies with markets holding the view that the Federal Reserve will maintain interest rates at current levels for a few months.

However as the week progressed, growing worries over the US subprime mortgage market started to weigh the dollar down.


Rating agencies Standard & Poor's and Moody's Investors Service warned of downgrading more than $17 billion in debt linked to risky mortgages, much of it subprime.

Subprime loans are extended to borrowers with poor credit. The reports of downgrading sparked a dollar sell-off and the US currency tumbled to a record low against the euro and a 26-year trough against sterling.

US subprime worries prompted the markets to price in a greater risk of an interest rate cut by the Fed within months.

The euro also drew support from comments by ECB President Trichet who said that the ECB's monetary policy remained on the accommodative side, signalling more interest rate hikes.

As the week drew to a close, the dollar remained flat against the euro near record lows supported by a six-month high in US consumer sentiment even though US retail sales for June showed an unexpected decline.

Last week's range: $1.3592 to $1.3813 (Dh4.9923 to Dh5.0735)

Range for this week: $1.3650-$1.3950 (Dh5.0137-Dh5.1238)

Yen

The Japanese yen started the week on a strong note boosted by data showing that Japanese core machinery orders in May, a key gauge of corporate capital spending, had risen more than the market expectations.

However, market appetite for the "carry trade" continued to hurt the Jap-anese currency which soon trimmed its gains against the major currencies.

The yen's slide was halted by an increase in the 10-year Japanese government bond yields toward the 2 per cent level ahead of the Bank of Japan's rate decision due later in the week.

The yen gained further against the dollar on US subprime concerns as markets cut back on their exposure to higher-yielding but riskier assets.

The yen rose to a one-month high against the dollar before pulling back as Japanese retail speculators were said to have bought back the US currency.

Meanwhile, the Bank of Japan kept interest rates steady at 0.50 per cent as widely expected by the markets.

Last week's range: 120.96 to 123.66 yen (Dh0.029702-Dh0.030365).

Range for this week: 120.80 to 123.80 yen (Dh0.029669-Dh0.030406)

Sterling

The British pound sat comfortably above the $2 mark as the week commenced with market expectations firmly entrenched in favour of at least one more interest rate hike by the Bank of England in the near future.

As the week progressed, US subprime mortgage market worries pushed the pound up to fresh 26-year highs against the dollar.

The weak US retails sales data released at the end of week propelled the British poun against the dollar.

In precious commodity news of interest, gold held its ground near a five-week high as markets saw potential for further gains aided by a slump in the dollar and rising oil prices.

Last week's range: $2.0095-$2.0366 (Dh7.3809 -Dh7.4804)

Range for this week: $2.0200-$2.0500 (Dh7.4195 -Dh7.5297)

[rexdmx]

Dollar hits new 26-year low against pound
By Babu Das Augustine, Banking Editor
Published: July 17, 2007, 23:21


Dubai: The dollar hit a new 26-year low against sterling yesterday as the euro hovered around an all-time high, mounting further pressure on GCC central banks to consider revaluation of their currencies as a policy option.

"Though the dollar's weakening has been an ongoing story for the past two years, the persistent weakness of the greenback against sterling and the euro during the past few weeks will once again stress the need for a rethink in the exchange rate policies in the Gulf," said HSBC economist Simon Williams.

Sterling soared against the dollar yesterday on inflation concerns. The pound hit $2.0438, as traders bought sterling heavily after June inflation data that pointed towards higher British interest rates. The euro rose to $1.3790 in early European trading, flirting with its all-time high of $1.38 it touched last Friday.



While the dollar reels under pressure from concerns about the US subprime mortgage market, reports on softening of inflation and lower expectations on interest rate also weighed in on the greenback.

"The weakening of the dollar is adversely affecting the purchasing power of expatriates. For every dirham they wire back home, they get less. The declining dollar also leads to rising costs for imported goods. However, the bulk of the inflation in the UAE and other Gulf states is homemade and comes from supply constraints associated with the local investment boom," said Eckart Woertz, programme manager of economics at Gulf Research Centre.

Despite the growing public demand for a revaluation of the dirham, the UAE Central Bank and the government have repeatedly said the country will stick to the peg as part of its commitment to the common Gulf currency.

"The global currency volatility once again proves the need for a unified currency and unified exchange rate policy for the GCC states as a whole. Instead of individual states making unilateral decisions on exchange rates, a common currency could stand its ground on international markets more easily and would offer new rooms to manoeuvre in terms of interest rate policy in case the new currency should be free floating at a later stage," said Woertz.

Although economists do not expect any decisive action by Gulf central banks in the near term, late last week Standard Chartered Bank said in a strategy note that a third round of revaluation by Kuwait is likely this year. Kuwait revalued its currency two times in during the past two months.

[rexdmx]

Getting a discount on purchase price
By E. Michael Johnson, Special to Gulf News
Published: July 20, 2007, 23:32


GCC currency exchange rate policy has been much debated by the governments of the region, especially after Kuwait differentiated itself from the GCC's approach.

In order to keep the economy cool against the apparently rising probability of revaluation, UAE Central Bank Governor Sultan Nasser Al Suwaidi said: "We rule out any change for the foreseeable future. The peg is a very important stability anchor and is part of why the UAE economy has been successful." In fact, the dirham exchange rate has been fixed at 3.67275 to the dollar since 1987.

What does it mean for corporates? Chief financial officers (CFOs) have to now live with this policy, to accept as given the fixed peg, and to review the micro-management strategies available to our enterprises in the UAE and the other GCC states, which follow a similar policy.




Yet there could be two variants to the policy. One is that the fixed peg simply remains at 3.67275. The other is that the fixed peg might shift from 3.67275, and then stay fixed again for a longer term. The probabilities for these variants are 75:25, in my opinion.

Sales quotations

One practice we can now increasingly discontinue: quoting into the local market in dollars. Several enterprises continue to do so. I know one such Australian enterprise, although they buy in Australian dollars.

Quoting in US dollars was valuable when the US dollar was stronger and dominant. Now it has become weak on a long-term basis. Unless the enterprise supply chain outflows are in dollars, it adds less value when sales managers quote in same, as one can save on exchange commission and transaction costs. You can also implicitly exercise stop-loss, in case the Central Bank does shift the fixed peg from its current value to a higher value.

The probability of local currencies strengthening against the dollar exists and it is likely to grow, in spite of the resolve announced by the Central Bank. One reason disclosed for holding the fixed peg is to facilitate GCC currency union. Yet, even when that might hit the market, the probability for a stronger valuation of the peg may grow during the run-up period.

There are enterprises in the GCC that import goods from non-dollar origin. Of these, the Chinese and Japanese currencies have not moved against the dollar as much as European currencies. This makes the imported cost of goods from Europe costlier, causing imported inflation.

With the fixed peg continuing, CFOs have to scrutinise more the business case from purchasing managers who continue to buy from European origin.

The official dollar peg policy should translate into citizens buying more from dollar-correlated economies. This is a good time to promote those brands, products and commodities. This means there is case for more advertisement and promotional investment to advance the case.

In other words, our corporate strategy should consider as an option - other things remaining the same - to integrate more with the US economy, since we absorb our foreign trade, exchange-rate and interest-rate policy from the US.

Some enterprises have no short-term option to switching their supply chain costs to cheaper US dollar sources. They have to activate three options simultaneously: (i) transfer the exchange-rate pushed costs to the customer, (ii) quote in the supply chain currency and/or increase the selling price, (iii) seek additional discount from the supplier or supply chain. A combination of such options will be necessary, and CFOs should seek active responses from sales and purchase managers from the three options respectively.

Such strategies are also correlated to the bargaining power of relevant customers and suppliers, depending on the enterprise. If customers have more bargaining power than suppliers, then we have to pull more discounts from the supplier. If the supplier has more bargaining power than the customer, then the customer may as well pay for it. Thus the enterprise having to measure the bargaining power of customers and suppliers becomes a central theme for CFOs, since that determines the power of CFOs to push and/or pull the exchange risk costs off the bottom line. The price elasticity of customers also needs to measured.

Changing other factors

The increase in currency risk and associated costs should prompt each CFO to question his enterprise's product-mix, raw-material mix, design, marketing and engineering teams to look at alternative ways, so as to protect the bottom line and remain competitive.

Macroeconomics, which determines the currency policy at the country level, does not prescribe that industry, firms, families and individuals should take the currency situation as merely to "live with it".

The creativity and freedom of entrepreneurs should provide the leadership to re-engineer the supply chain structure and costs such that the US dollar peg does not by default translate into imported inflation.

In my opinion, if our enterprises stay more objective, we can control perhaps 10 to 25 per cent of the factors driving inflation in our economy, at the enterprise level itself.

Another initiative the CFO, should consider is to initiate margin trading platforms, and buy currency when they are in their lower side of the band, with two to five per cent leveraged margin and hedge against the currency risk at lows and highs of the price band. Locate a central bank licensed currency broker and start a corporate account. This will be an enabler to contain the currency risk costs. This will also mean that the inflow outflow currency mis-match is forecast from the annual budget and positions taken accordingly. If this enabler is not yet in the practices of the enterprise, then now is the time to kick start the same, invest in this learning curve. This can control some three to eight per cent of the supply chain cost.

For instance, CFOs should consider parking surplus funds in call accounts in euros and/or pounds, where interest rates are comparable and appreciation scope is better, rather than leave it all in dirham or dollar call accounts by default - just as central banks also have started diversifying their funds.

On average most CFOs leave over 50 per cent of the surplus funds or deposits in dirhams or dollars.

Do not take a currency and its effects for granted. Manage it actively; CFOs should lead.

Dubai case study: Getting a discount on purchase price

I know a territory manager of a marine electronic engineering firm in Dubai, who took the bull by the horn, negotiated lower euro/crown prices from his Scandinavian manufacturer, arguing that when the euro/crown becomes stronger, he should get an equivalent purchase price discount to keep the sales up against US dollar origin goods competition.

The waterfront developments in GCC were increasing the demand for marine electronics, and capturing more market share was important and urgent. The Scandinavian manufacturer sales chief readily agreed, as he did not want to lower their global market share. So the macroeconomic argument that UAE Central Bank policy per se is importing inflation due to dollar peg policy of most GCC is not very accurate.

All GCC CFOs should demand that their purchase managers demand higher rate discount to set off currency weakness thus bring down the net costs and thus the prices to the GCC consumers or on parity at the net level whether the goods come from Europe or US. Again, the key is to enhance the bargaining power. Given a fast growing regional market, our CFOs should have the power in the market, on the demand side.

Several purchase managers are not aggressive on the currency costs, and consider that as given and rigid. Some even, leave the currency issue into the domain of finance department.

- The writer is chief financial officer, Demat-SeasprayGroup. Views expressed here are personal.

[rexdmx]

Dubai: Kuwait allowed the dinar to appreciate 1.7 per cent against the dollar in its third revaluation in just over two months as the US currency tumbled to record lows against the euro.

The dinar would trade at 0.28200 per dollar, the central bank said. The previous rate was 0.28690 a dollar.


--------------------------------------------------------------------------------

[AltinD]

So is still "delinking to USD" ruled out or they (the Goverment) will actually take any step?