MIDDLE EAST SUPPLEMENT - PDF document

16MIDDLE EAST SUPPLEMENTJUNE 2010midd
16MIDDLE EAST SUPPLEMENTJUNE 2010middle east supplementFOREIGN EXCHANGEWorld Currency Unit, is a unit of value createdthe currencies of the worldÕs top20 national economies, as measured by GDP, andweighted by means of a GDP-based algorithm (see CashManagement Supplement, Winter 2009, http://tinyurl.com/3a6cezp). One obvious advantage of the wocu is that as astandard settlement currency for international trade it willeduce uncertainty and risk. It will ensure that boththe trade because it will not be affected by sudden changesin foreign exchange rates. For commodity exporters in theMiddle East this settlement certainty will enable moreaccurate cash flow predictions which will help both short-term cash management and longer term profit planning.y, it will mean that long-term infrastructure projectslife of the project. The Middle Eastern nations are leaders inthe creation or funding of such infrastructure products.By pricing and selling commodity exports in the wocu,the exporter then has an automatic reserve of the worldÕstop 20 currencies that can be used for direct wocu sales orto be used directly asvereign currencies. Economic and political dependence onthe dollar will be reduced, although it will continue to beof 20 currencies. This Òstepping awayfromÓ but not outright abandonment of the dollar may beattractive to younger generation Middle Eastern traders ory, or country, mayhave about dealing with a specific sovereign party.raders using the wocu will not need to be as concernedforeign exchange positions as they areencies. The conceptof preserving wealth is a key Shariah principle but the use ofthe hedging tools and instruments may be asensitive issue in some Islamic financial institutions andSYNTHETIC CURRENCY, REAL ASSETSAlthough the wocu isreview of the wocu has yet to be completed by Shariahassets) denominated in the currencies of the 20 economiesthat constitute the wocu in a proportion equal to theweightings of the algorithm, the wocu would then take on theproperties of a warrant that represents ownership of a basketof real assets. This would need debate by scholars but thefor Shariah compliance is noteworthy. Additionally,desirable Shariah traits of reducingrisk and uncertainty.Sovereign wealth funds, a topic of considerable interest tosome Middle Eastern participants, could also benefit from re-denomination of some of their assets into the wocu. Again,this would spread risk, reduce hedging needs and move awayom total dependence of a single sovereign currency unitect control of Middle EasternThe international sukuk market (sometimes referred to asIT MAY NOT HAVE BEEN AROUND VERY LONG BUT THE WORLD CURRENCY UNIT, OR WOCU,COULD BRING A LEVEL OF STABILITY TO INTERNATIONAL TRADING THAT THE MARKET MUSTSURELY EMBRACE, SAYS DON BROWNLOW.All for one in thecurrency stakes slamic bonds) may benefit from the wocu. New issues ofsukuk may consider denomination in wocu in order to avoidproblems of project earnings being continuously exchangedinto dollars for repayment and profit distributions to itsAn announcement of bunker fuel being priced in wocu byNavitas Resources has recently made. WHY WE NEED THE WOCURecent FX currency marketvolatility and uncertainty has focused attention on the needfor an apolitical, non sovereign balanced currency. Storiesabound of large multinational companies losing very largesums of money on unsuccessful hedging strategies. Becauseit reduces volatility, the wocu will significantly reducehedging risks and related hedging costs as less hedging willbe required. A well respected financial engineer recentlystated that reducing volatility by a factor of two will reducehedging costs by a factor of four. Like the wocu, the International Monetary FundÕs specialet currency, but one that is more political and less wellwas created in 1969 to

support the BrettonWoods fixed exchange
support the BrettonWoods fixed exchange rate system, but continued followingoods. It is used for such things asinternational postage, international roaming charges formobile telephone companies and in some areas ofinternational shipping and transport.years and it only contains four currencies (dollar,sterling yen and euro) so its ability to facilitate multinationalthrough reduced volatility is limited. Special drawingopen to political interference.worldÕs rapidly emergingBRIC (Brazil, Russia, India, China) economies, nor the growthIn comparison, the wocu, as mentioned above, isreweighted and its constituents updated every six months. Ithas no political interference and simply reflects constituentcountriesÕ GDP. It is therefore very well suited to the conductin the modern worldound the GCC area,but these are more regional and do not have theinternational self-dampening affect that will help controlexchange rate volatility.DEVELOPMENT TOWARDS A TRADED INSTRUMENTof major European banks are in discussions with thee expressed a willingness to settleboth ends of a commodity trade conducted in wocus. Theyhave indicated that over time they will support wocudenominated accounts and thus enable companies to holdwocus rather than simply settling trade in wocu. Multi-bankdealing system vendors have also indicated that as soon aswocu is traded by major banks they will have it availableThe WDX Organisation is also in discussions withinternational exchanges and clearing houses to develop tradeonly in wocu but also in futures, options and othere instruments. The pricing of bunker fuel in wocu byNavitas Resources has recently been announced.consensus among members of the WDX Institute and riskand regulatory management within manor consulting firms isthat as the wocu is a basket of currencies it does not requirewith corporate treasurers andbanks to facilitate trade denominated in wocu, and withokers, exchanges and clearing houses to ensure that thetradable instrument. the wocu. There hasbeen much publicity recently about the desire of manythe Middle East to moveaway from the US dollar as the de facto global reservecurrency. The wocu answers this need in that it is apolitical,although it does not represent a total immediate move awayfrom the US dollar as the dollar is a large component of theFor many of the Middle Eastern nations their commoditywealth Ð is at themoment tied to the uncertain value of the US dollar. As emerging economies grow, their currencies can becomepart of the wocu by virtue of GDP growth rather thanpolitical manoeuvring. Over time corporate treasurers willwork with their banks not only to price trade in wocu butto hold assets in that currency. The wocu is an ideaAn apolitical and less volatile instrument is needed as theglobal economy changes, as financial power moves east andthe emerging economies take over from the leading financialpowers of the last century.ownlow is director of Bayfield Consulting, whichd.brownlow@btinternet.comwww.bayfieldconsulting.comJUNE 2010 MIDDLE EAST SUPPLEMENT 17middle east supplementFOREIGN EXCHANGEExample uses of the wocu by multinational companiesA company has a global product but the sales costs etc are in adomestic currency.It prices the product in wocu and eitherestablishes a local price based against wocu (possibly setweekly,monthly whatever,based on unit price,market etc),butthe sale is effected in local currency or a bank is asked toA company has buyers in different countries and seller in different countries.It makes no sense to exchange wocus intolocal currency only then to convert it back to settle invoices.Better that a wocu account is maintained and used for theincoming and payment of funds to satisfy the buying and sellingof the commodity.The only transaction into local currency will befor the ÒprofitÓelement