Why the Gulf's Currency Integration Will Benefit International Investors

By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

On Jan. 1, six Gulf states joined together - Saudi Arabia, Qatar, Bahrain, Oman, the United Arab Emirates (UAE) and Kuwait - to form a single common market, not unlike the European Union (EU), which has served as its model. The common market, valued at $715 billion, is the first step toward common banking, common exchanges, and even increased ties between the nations.

But will it increase international investment in the region?

We think so. But for it to really work, there's going to have to be a single currency at the end of the day.

I've been following this story for years and, in fact, first suggested that a shared currency would play an important role in opening the Middle East region to U.S. investors. At the time, many people thought my remarks were among the craziest things they'd ever heard.

But as the old adage goes, reality is often stranger than fiction.

It turns out that many prominent Middle East investors have quietly advocated just such an approach for years. Now it appears as if it will become a reality.

With regard to timing, there is still some debate. Some, including prominent proponent Abdul Rahman ibn Hamad al-Attiyah [who serves as the Secretary General of the Riyadh-based Gulf Cooperation Council (GCC)] believe a common currency could be possible in as little as two years from now - in 2010. Others think 2013 is much more realistic, since Oman, in particular, appears to be having problems ahead of the transition. But the Oman government has firmly stated that it will make the transition eventually.

So this is a question of "when," rather than "if."

What's in it for the region?

Everything. Most of the regional currency is presently pegged to the U.S. dollar. This means that, as the dollar has lost value, so has the region's clout. On the heels of inflationary pressures against the dollar, the region's central banks are struggling to contain their own economies, particularly when it comes to regional inflation, which is a big worry right now.

And that's really what's driving much of this. Under normal conditions, Middle Eastern central bankers would be raising rates to stave off inflationary pressures. But, thanks to the Ben S. Bernanke-led U.S. central bank turbo charging its greenback printing presses, that's not an option. Instead, Middle Eastern banks have had to reluctantly follow along by lowering rates almost in lockstep with U.S. Federal Reserve policymakers - simply to mitigate the risks they face as they relate to the dollar.

In other words, as long as the Arab states' currencies are pegged to the dollar - and as long as those states cannot float their own currencies - the region remains highly dependent on how our Fed handles itself in the current financial crisis. And, lately, that's not something the central bank has done very well.

As a result, many Middle East business leaders and investors want a united, floating currency that's independent of the international community in general - and the United States in particular. Not only do those Middle East insiders believe that it would remove risks associated with the dollar, they also think that it would facilitate cross-border cooperation in the region, which has arguably been one of the biggest benefits the EU has reaped from its own integration.

And that brings us full circle with regard to our money.

An integrated currency will facilitate international investment in the region on a scale that's never been seen before. Couple that prospective development with the financial-market consolidations already under way worldwide [and Middle Eastern involvement in that process] and you have the potential for some very impressive growth - if for no other reason than it would help solidify a newly established currency.

The so-called "Global Titans" that we follow are logical beneficiaries, particularly when you consider that the Middle East is poised for high single-digit economic growth for the foreseeable future. And when you also consider the fact that the region is literally flooded with liquidity - thanks to record high oil prices at a time when American and European markets are staggering - and you have the potential for some real winners in the next few years.

We're actively looking at several investment choices right now and will tell you about them as the region's currency consolidates in what we expect to be short order.

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About the Author

Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.

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