What does the UAE currency union exit mean? (page 1 of 2)

'Now, is this good or bad news?,' people asked yesterday, when they heard about the UAE's pullout from the GCC monetary union project.

A common currency was planned for 2010 (after it was initially planned for 2002, then postponed until 2005 and then eventually targeted for next year).

From this point on, the four GCC members Saudi Arabia, Kuwait, Bahrain and Qatar remain in the process to introduce a common pan-region currency.

'The decision is definitely a major one and will affect the whole process towards achieving a single currency', says Faisal Hasan, Head of Research at Global Investment House in Kuwait.

The UAE is number two in the GCC behind Saudi Arabia in terms of economic power and population. Its capital, Abu Dhabi, aimed to host the future GCC Central Bank, a claim which was also expressed by Riyadh.

However, 'no official comment has been made to justify the UAE's decision', says Mary Nicola, Economist at Standard Chartered Bank in Dubai. What looks like a hasty or even surprise move at first, might have been a planned exit.

Oman had already announced in December 2006 that it 'will not be ready to join in 2010', a move which triggered the first doubts about the 'Euro of the Gulf'.

Unclear implications

Timeframes were set and convergence criteria, similar to those of the European Monetary Union (EMU), were implemented. But in reality, the six GCC member countries never embraced the idea of replacing their dirhams, riyals and dinars with a common currency.

Meanwhile, pessimism grew globally due to the financial crisis. This triggered a 'my country first' attitude in every part of the world. 'With Oman already not part of the process, the decision for the UAE to pull out will have majorly impacted the viability of the union,' Hasan adds.

But will the pullout affect the 18-year-old GCC in general? A common market was introduced in 2008 and GCC citizens were given the freedom to move, live and work anywhere in the entire union. Interregional trade has been on the rise. Today, the UAE trade with the rest of the GCC accounts for about 10% of its total trade, according to Standard Chartered. 'We believe the actual market impact will be limited,' Nicola says.

The Riyadh Stock Exchange, the biggest GCC market in terms of market capitalisation, had almost no reaction to the news. Since the new currency is to be pegged to US dollar, as all GCC currencies are (with exception of the Kuwaiti Dinar, which is pegged to a basket of currencies), there will also be few changes regarding the monetary policy in the UAE in relation to its neighbouring states - if the 'Al Khaliji', as the new money is rumoured to be named, ever comes into being.