Common currency 'not big issue'

Abu Dhabi: The UAE's decision to pull out of the Gulf Cooperation Council's (GCC) common currency project will have little impact on the local economy, three prominent economists agreed yesterday at the MegaTrends economic conference.

Since less than 10 per cent of the UAE's trade activity involves GCC countries, the country will likely see little negative impact stemming from its decision to pull out of the monetary union, Giyas Gokkent, Chief Economist, National Bank of Abu Dhabi, said.

Still, the economists warned the continuing exodus of foreign workers could threaten the country's short-term prospects for economic recovery and urged the government to accelerate the pace of economic diversification away from the oil and real estate sectors.

More than 70 per cent of projects in the UAE are related to real estate in some form, according to Gokkent.

Mohammad Ahmad Bin Abdul Aziz, Director-General of the Ministry of Economy, said the government has worked to reinvest its oil revenues in infrastructure-building, health, education and economic diversification, most notably tourism and renewable power generation.

In 2008, the government committed Dh120 billion to shoring up the banking sector and guaranteed commercial deposits to encourage private investment. But Gokkent said more needs to be done to insure greater transparency and increase investor confidence.

"The policy rate transmission mechanism is completely broken," Gokkent said. The cost of lending between banks is usually not reflected by the Interbank rate, he added, which translates into an entirely different real market rate.

Abdul Aziz did not address the interbank rate system, but promised the government would launch an independent authority "responsible for all data and statistics in the UAE" by the end of the year.

On the positive side, Mohammad Jaber, lead GCC economist and vice-president, Morgan Stanley, said GCC countries, particularly the UAE, remain in good shape overall as they have managed to save nearly $1 trillion (Dh3.67 trillion) over the past five years from oil revenues.

The capital now allows these countries to increase public spending without going into debt or struggling to manage massive budget deficits as is the case with some developed western economies, he said.

The UAE is on the path to recovery and the worst of the financial crisis is behind it, a senior economic official said.

"I think recovery has already started and we are going to see positive indication by the third quarter and fourth quarter," Mohammad Al Shehi, Under-Secretary of the economy ministry, said.

A rebound in oil prices is helping Gulf economies weather the economic crisis. Crude is presently trading at about $61 a barrel, almost double its December low of $32.40.

The International Monetary Fund forecasts that the UAE economy will shrink just 0.6 per cent this year, and post growth of 1.6 per cent in 2010.

"Oil prices are going up and confidence levels are coming back, things are going in the right direction," said Al Shehi.

Higher oil prices are softening the impact of the credit crunch on the region's real estate and finance industries.

- With additional inputs from Bloomberg