GCC could be forced to abandon dollar peg

Abu Dhabi: GCC countries will be forced sooner or later to abandon their foreign exchange regimes, where they peg their currencies against the dollar, participants at The Econ-omist's World in 2008 Forum said.

"The debate on the region's peg will get further heated in 2008, and China represents a good example of the subsequent difficulties," said David Jackson, Istithmar's chief executive officer.

"The element of imported inflation will increase the pressure, as the practice of destroying the value for future generations by maintaining the peg to the dollar will be questioned," he added.

Integration

With more economic integration taking place between the GCC states, the decision to depart from the peg can become easier in the future, or maybe a scenario of de-pegging, revaluations, and then re-pegging can be expected, participants said.

Meanwhile, recent investments of the Middle East's sovereign wealth funds in US assets are not expected to yield any returns in the short term.

With financial assets falling in value by about 69 per cent since the outbreak of the subprime mortgages crisis, and the substantial write downs for tens of billions of dollars, the capital base of these assets are weakened, as they will need time to adjust their balance sheets.

"Yet, in the longer term of a five to ten years' horizon, we can see these assets yielding gains," Albert Momdjian, Dubai International Financial Center's branch chief executive officer said.

"Sovereign wealth funds are also facing difficulties as a reason of the suspicious in countries like the US or Germany, and they need more transparency, as well as an education campaign to offset these hurdles," he added.