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