x Abu Dhabi, UAEWednesday 26 July 2017

Better times smile on Geithner's visit

The economic interests of the US and the Gulf have drawn closer as the dollar has stabilised and sovereign funds are proving more palatable to Americans.

US Treasury Secretary Timothy Geithner speaks to Saudi business leaders in the commercial hub of Jiddah, Saudi Arabia, in July.
US Treasury Secretary Timothy Geithner speaks to Saudi business leaders in the commercial hub of Jiddah, Saudi Arabia, in July.

The economic interests of the US and the Gulf have drawn closer as the dollar has stabilised and sovereign funds are proving more palatable to Americans. You may recall the early days of Barack Obama's presidential campaign. To the detriment of more seasoned centrists such as Hillary Clinton, the wild-card candidate took a firm line on foreign trade from the off: no more outsourcing of US jobs; a potential renegotiation of the North American Free Trade Agreement to protect US producers; and an end to dependence on the vagaries of Middle East oil. To a certain type of liberal activist, the marked contrast to the free-trade conservatism of the Bush administration was pure catnip, and helped add meat to the otherwise policy-light manifesto of "yes we can".

As might have been expected from any maverick turned front-runner though, such iconoclasm did not survive the shift from soapbox to White House. President Obama has thus far proved to be economically pragmatic - much like his Democratic predecessor, Bill Clinton - and while the budget deficit may have soared to boost economic recovery, the rhetoric has softened to the status quo. The revolutionary wind has thus far failed to reach US trade policy.

All of which serves to make the recent Gulf visit of Mr Obama's Treasury secretary, Timothy Geithner, less of a contrast than might have been imagined. It is just over a year since Henry Paulson, the Treasury secretary to the previous administration, toured the region to prop up US monetary policy. Back in June last year, the Treasury secretary was perhaps as close to supplicant status as anyone in his office has ever been.

The dollar was trading at two to a pound sterling and oil was almost US$150 a barrel. Several economies of the GCC, fed up with having to enforce counter-cyclical interest cuts to maintain their pegs, were apparently considering re-pegging or even de-pegging their currencies from the greenback. At the time, Mr Paulson mixed flattery with mild disingenuousness to keep the GCC on side. Gulf producers "can't alone alleviate" the price of oil, he told the press (in marked contrast to the tone of his employer, George W Bush, during his earlier visit). He also added that "the dollar peg does not influence inflation to a significant degree" and that "ending the peg is not the solution to the inflation problem".

The Bush administration, he reassured government officials, was committed to a strong dollar. Finally, he added that the US remained open to sovereign wealth, and would like to "benefit" from such investment. Mr Geithner, by contrast, told his audience - which included King Abdullah of Saudi Arabia, Sultan al Suwaidi, the Governor of the Central Bank, and Sheikha Lubna Al Qasimi, the Minister of Foreign Trade - that the US was keen to attract Gulf investment into its economy, while adding that "it is the policy of the United States, and it will remain the policy of the United States, to remain committed to a strong dollar". The more things change, it seems, the more they stay the same.

How, then, does Mr Obama's policy to the Gulf differ to his predecessor? To answer that, we need to look at what has changed since the days of the Bush administration. To start with, the price of oil has for the time being slipped down the list of priorities, and is no longer a source of continuing friction between the US and the Gulf. Likewise, the dollar has recovered some of its value on international markets, while the shift from inflationary to deflationary pressures in the Gulf means a low federal base rate is now in harmony with necessary monetary policy. The diminished value of sovereign wealth funds has also removed another source of protectionist sentiment in the West, with the result that officials such as Mr Geithner can now court those funds without creating a political ruckus back home.

As such, the short-term economic interests of the US and the Gulf have once more drawn closer, if not fully realigned. However, the vagaries of the economic big wheel - which at various times pulls economies apart then pushes them back together - is perhaps a less significant factor in long-term relations than strategic policy decisions (or perhaps indecisions). In particular, the recent announcement that the UAE would be pulling out of the planned GCC monetary union places the US in a much stronger long-term position.

Despite assurances that such a currency would remain tied to the dollar, there is really little point in creating a single currency unless one eventually intends to float it freely. Continued monetary division among Gulf oil producers has reinforced the dollar's position as fiat currency for the world's most widely traded commodity. Indeed, perhaps one of the most interesting developments of this economic crisis is the fact that the dollar appears to be emerging from it with its position as global reserve currency even more firmly entrenched than before.

In monetary terms, de-dollarisation is the veritable dog that did not bark. The Chinese government may have caused a stir shortly after the Group of 20 (G20) summit in London when it suggested the creation of an alternative reserve currency, yet in concrete terms there is really very little chance of such an alternative arising. The abeyance of the GCC currency union on its own places the Obama administration in a much more comfortable position with regard to Gulf relations: commentators noted that, in comparison to his predecessor, Mr Geithner's posture during his visit was much more humble and discreet, his tone less lecturing.

Most of these commentators, however, failed to note that, in light of these developments, he can well afford to be. For the Obama administration, the challenge over the next three and a half years will be convincing creditors in the Gulf and China that their government's ballooning deficit will one day be brought under control, and that assets that have already slumped in value by perhaps a third will sink no further, and indeed eventually recover.

A challenge, certainly; yet one made easier by the increasingly evident lack of alternatives. business@thenational.ae