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Will the GCC finally dump the dollar: controversy continues throughout the Gulf about the merits of the US dollar, despite the support shown for the greenback this summer by governments in the GCC and in the Organisation of Arab Petroleum Exporting Countries (OAPEC).

Article Excerpt
After much speculation last year about the possibility of Saudi Arabia, Bahrain, Qatar, the UAE and Oman shifting their riyals, dinars and dirhams away from their official links--or pegs--to the US currency, the arguments for such a move have been heard once again, not least because the world's new economic giants, China and India, are also looking for an alternative to the dollar. French president Nicolas Sarkozy's attack on the dollar, along with calls for a new reserve currency from Russia, Brazil and other countries at the G8 Summit in Italy in July, raised the global temperature another notch.

Part of the recent debate has been fuelled by reports that the Gulf's sovereign wealth funds (SWFs) have seen the value of their holdings plummet by some $100bn to $1.1 trillion in the first six months of this year alone (see story page 36). While some of that loss is due to the decline in global asset prices as a result of the worldwide financial crisis and recession in many developed economies, much of it, according to respected international economic analysts, is due to losses incurred on the GCC's massive investments in the US, particularly US Treasuries, other government bonds, equities and real estate.

At present, the Arab oil exporting countries of the Gulf are the largest international investors in the American stock market, and among the largest buyers of its government bonds, as well as having invested an estimated $25bn in the past few years directly in banks, corporates and real estate. Together, the Arab oil producing countries hold more US dollars in their foreign currency reserves than any other nation except China. Given that the currencies of the GCC states are set at fixed, official rates to the dollar, and that Kuwait's is also partially linked to it, the GCC has not seen its holdings in the US depreciate in value to the same extent as other foreign investors, particularly the Chinese and European central banks.

Crude oil, the region's predominant export, like investments in the US, is also priced in US dollars on international markets, and while some of the greenback's appreciation in the past year helped to ease the dramatic slide in the price of crude since it reached a peak of more than $140 a barrel in July 2008, the gains have not been enough to offset the losses. Although oil prices are now recovering some lost ground, several GCC governments still face current budget deficits because of the sharp fall in their oil revenues. Kuwait-based OAPEC, which accounts for almost two thirds of the world's oil reserves, reported this summer that the Arab producing countries' losses last year amounted to more than $123bn, or about one fifth of their total oil income.

Arab oil export earnings increased in 2008 to a record high of about $618bn in current prices last year as a result of higher prices and production, the report said. But in 1995 dollar prices, the earnings stood at only $494.6bn....

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