Strong Dirham?
Think again.




Ikaraam Ullah    June 2010
The Facts
• The Euro has lost some 15% of its value since
  the beginning of the year. Sterling also fell by
  as much, bu...
Currency Movement Against the US$
110                                                                                     ...
The ‘Strong’ Dirham
• Euro appears weak relative to 2008 but not
  over the decade.
• If the next US rate movement is up -...
Trade Weighted Dirham Indexes
 Indexed, 2000 = 100
105                                                                    ...
The ‘Weak’ Dirham
• Index is approximate, representing 70% of
  (non-Oil) Imports, Exports and Re-Exports.
• Nominal Effec...
Importance of Exports & Imports
  US$ bn                                                                   US$ bn
  40    ...
Benefits of Pegging
• Is there a trade benefit? Over past
  decade, 30% UAE’s imports priced in Euros
  and 30% exports pr...
Risks of Pegging
• Relatively high inflation in UAE (~12%
  compared with 5% in the US) means loss of
  competitiveness, n...
Floating Exchange Rate ?
• Should the UAE have to infer credibility by
  maintaining a peg?
• Should a currency reserve be...
Thank you.



ikaraam.ullah@gmail.com
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Strong Dirham? Think Again.

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Strong Dirham? Think Again.

  1. 1. Strong Dirham? Think again. Ikaraam Ullah June 2010
  2. 2. The Facts • The Euro has lost some 15% of its value since the beginning of the year. Sterling also fell by as much, but for different reasons. • Or the US Dollar has strengthened on the back of a weak global economy. • And some currencies have stayed strong (Malaysia, India, Thailand)
  3. 3. Currency Movement Against the US$ 110 110 Dirham (US$) Strong INDIAN RUPEE 100 100 90 90 STERLING 80 80 70 70 EURO Dirham (US$) 60 60 Weak 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Jan Feb Mar Apr May Source: US Federal Reserve, *Annual averages 2000-2009, Monthly averages Jan-May 2010
  4. 4. The ‘Strong’ Dirham • Euro appears weak relative to 2008 but not over the decade. • If the next US rate movement is up - dollar gets stronger – better Euro rate to come? • Examining nominal exchange rate strength masks underlying trends. Looking at UAE’s trade partners reveals something else..
  5. 5. Trade Weighted Dirham Indexes Indexed, 2000 = 100 105 105 Dirham (US$) Strong RE-EXPORTS 100 100 EXPORT 95 95 90 90 IMPORTS Dirham (US$) 85 85 Weak 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010* Source: US Federal Reserve, Customs Departments (Abu Dhabi, Dubai and Sharjah), *Jan-May 2010
  6. 6. The ‘Weak’ Dirham • Index is approximate, representing 70% of (non-Oil) Imports, Exports and Re-Exports. • Nominal Effective Exchange rate for Exports and Re-exports is higher than Imports. • UAE spends more Dirhams (barrels of oil) on Imports than it gains from Exports despite the currency peg to the US$. • UAE Imports are more than double Exports.
  7. 7. Importance of Exports & Imports US$ bn US$ bn 40 40 EXPORTS 30 30 20 20 10 RE-EXPORTS 10 0 0 -10 -10 -20 -20 IMPORTS -30 -30 -40 -40 -50 -50 -60 -60 -70 -70 1985 1995 2005 Source: Customs Departments (Abu Dhabi, Dubai and Sharjah)
  8. 8. Benefits of Pegging • Is there a trade benefit? Over past decade, 30% UAE’s imports priced in Euros and 30% exports priced in Indian Rupees. Benefit of peg accounts to less 15% of imports and 20-25% of exports. • Argentina pegged its currency to avoid a repeat of hyperinflation – the UAE has no such recent experience. If importing inflation is a risk to everyone, why worry?
  9. 9. Risks of Pegging • Relatively high inflation in UAE (~12% compared with 5% in the US) means loss of competitiveness, no correction mechanism. • Higher inflation means on a government level the UAE forgoes more barrels of oil in expenditure for the same output. • Oil prices have risen faster than inflation. If oil price growth slows or goes into reverse = problems for public finances.
  10. 10. Floating Exchange Rate ? • Should the UAE have to infer credibility by maintaining a peg? • Should a currency reserve be needed if several large wealth funds fulfill the function already? • Staying out of the GCC monetary union means UAE is ‘out’ of joining the GCC monetary union but still ‘in’ the union of fixed exchange rates. Is a union needed?
  11. 11. Thank you. ikaraam.ullah@gmail.com

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