According to various reports, central bankers from Saudi Arabia–whose capital Riyadh is slated as the home of a planned future regional central bank–are increasingly pessimistic as to the odds of the once much bally-hooed 2010 transition to a single Gulf currency and monetary union across the six-member GCC. This despite the fact that prices rose 10.5% in the Kingdom in April, the fastest pace in over three decades, and UAE inflation touched the 20-year peak of 11.1% last year. In the meantime, dollar pegs forced various countries to mirror declining U.S. interest rates despite windfall oil profits and domestic price increases. Yet certain countries, such as Kuwait and Syria, have already dropped their dollar ties. Moreover, there is scant evidence that dropping the peg did much for Kuwait’s inflationary pressures. Some analysts reckon, for instance, that inflation is less tied to fuel and more tied to factors such as food prices, construction materials such as cement, and other key commodities.
Meanwhile, investor confidence in the Gulf is predicated upon a hearty balance of payments which is predicated largely on resources such as crude oil or, in Qatar’s case, LNG. Yet as OPEC noted last fall, “retreat of the U.S. and European economy has a negative affect on the balance of payments in GCC countries.” That is to say that investing on the basis of the region’s reserves is still just a proxy on global demand. The real question may be at what point said demand rests less on the West, and more on the BRICs. Until it surely does, Gulf finances arguably remain flimsy and its markets will be that much more volatile.