STILL NO CHANGE IN UAE VIEWS ON PEG

C O N F I D E N T I A L ABU DHABI 000320 SIPDIS SENSITIVE SIPDIS STATE FOR NEA/ARP, EEB/IFD/OMA TREASURY FOR BAUKOL, MATHIASEN, ROSE E.O. 12958: DECL: 03/13/2018 TAGS: EFIN ECON AE SUBJECT: STILL NO CHANGE IN UAE VIEWS ON PEG REF: 07 ABU DHABI 2059 Classified By: Martin Quinn, Charge d'Affaires a.i., for reasons 1.4 b and d. ¶1. (C) There continues to be a constant drumbeat of news, chatter, and speculation that the UAE will deal with inflation by either de-pegging from the dollar or revaluing the dirham. Despite this, UAE financial officials continue to tell us that the UAE remains committed to the peg. Abu Dhabi Department of Finance Under Secretary Hamad Hurr Al-Suwaidi told Treasury Attach that he was unaware of any changes in UAE policy regarding the peg (reftel). He reiterated that UAE continues to study the issue and has no plans to de-peg or revalue. When asked about recent press reporting speculating that Qatar may revalue, Al-Suwaidi stated that such a move by Qatar would increase pressure on UAE to revalue as well. However, even in this situation, he said revaluation remained &an outside chance.8 (Comment: As de facto head of Abu Dhabi,s Department of Finance, Al-Suwaidi is well positioned to monitor the UAE,s internal currency debate. End Comment) ¶2. (C) On March 13, the UAE Central Bank's economic advisor told econchief that -- as far as he knew -- the Governor remained committed to the peg. He categorically denied news reports that the Central Bank had set up a task force to evaluate de-pegging the dirham. He reiterated the Central Bank's view that the overheating UAE economy was largely driven by massive public and private sector development projects, and inflation resulted from capacity constraints. He noted that the Central Bank had presented a report to the UAEG in 2006 arguing that a political decision was needed as to whether the UAE would push for extremely rapid economic development or would accept a slightly slower rate of growth. If the former, the consequence would be inflation. Since that time, he said, inflationary expectations had set in. Seventy percent across the board salary increases for federal workers only reinforced those expectations. ¶3. (C) The advisor admitted that others in the UAE government might have different views, with the new Minister of Economy publicly saying that the peg was "contributing" to inflation. People were looking for someone to blame for inflation. Dirham weakness -- and the Central Bank's support for the peg -- was a good candidate. In response to econchief's question as to whether, even with a floating exchange rate, the Central Bank would politically be able to take the steps needed to reign in inflation, he mentioned a meeting where officials had accused the Central Bank of not doing enough to contain inflation. The Central Bank's response was "ok. De-peg and we will raise interest rates sharply." He stated that the response was "you can't slow money supply growth." It would cut economic growth. ¶4. (C) Comment: Inflation continues to be a major problem in the UAE and is beginning to threaten growth, with workers seeking higher wages and housing allowances, and the high cost of materials delaying projects or increasing their costs. The Ministry of Economy's agreement with certain supermarkets to cap prices of basic goods along with UAE Vice President, Prime Minister, Ruler of Dubai Sheikh Mohammed bin Rashid Al-Maktoum's decision to exempt steel and cement from customs duties all are efforts to be seen to be "doing something." Although it does not appear that the UAE is prepared to de-peg in the near term, continued dollar weakness will only increase the pressure on decision makers here to either revalue or de-peg. Given the UAEG's insistence that changing the peg would need to be a coordinated GCC decision, if another GCC country either revalued or de-pegged, this would also increase pressure on the UAEG. End Comment. QUINN