MIDDLE EAST CURRENCY MARKET SEES KEY CHANGES

  Middle East currency dealers meet in
  Abu Dhabi this weekend at a time of fundamental change in their
  business, which has seen a growing volume of trade shift from
  the Arab world to London.
      The 14th congress of the Inter-Arab Cambiste Association
  also comes at a time when the prospect of a unified Gulf
  currency system is more real that at any time this decade.
      Foreign exchange traders and bank treasurers said these
  issues, and the slide of the Lebanese pound, can be expected to
  be major talking points.
      About 250 traders and treasurers from some 115 banks --
  including some in London and other major non-Arab financial
  centres -- are expected to attend the conference which begins
  on on Saturday.
      Bankers said it is hard to avoid the impression that a
  growing proportion of transactions in the Saudi riyal market,
  by far the largest in the region, is being carried out in
  London.
      The market had been dominated by Saudi Arabia's 11 banks,
  foreign exchange houses in the Kingdom and offshore banks in
  Bahrain. But bankers said more and more Saudi and Bahrain-based
  banks are boosting their treasury operations in London.
      As recession hit the Middle East and the need for trade
  finance in the region declined, many offshore banks in Bahrain
  ran down their currency operations. None of the four major U.K.
  Clearing banks now has a dealing room on the island.
      The two major Bahrain-based international banks, &lt;Arab
  Banking Corp> and &lt;Gulf International Bank BSC> have increased
  their presence in London and Saudi banks are busy upgrading
  representative offices to branch status to allow dealing.
      One economist said: "It is cheaper to run a riyal book in
  London than staff an expensive offshore operation in Bahrain...
  There is now the nucleus of a two-way market in London."
      Jeddah-based &lt;Riyad Bank> set up as a licensed deposit
  taker in London in 1984, while its main rival in Saudi Arabia,
  &lt;National Commercial Bank> (NCB) won a licence in November
  1986.
      The major market maker has traditionally been London-based
  consortium bank &lt;Saudi International Bank> but the kingdom
  joint-venture &lt;Saudi American Bank> (SAMBA) also upgraded its
  London operation to deposit taker status in mid-February.
      One senior currency trader in Riyadh said: "Inevitably the
  volume of business in London has gained pace with the two new
  licences for NCB and SAMBA, but there is no question that most
  of the liquidity still rests in Saudi Arabia."
      Currency traders said the shift to London in the Saudi
  riyal market is difficult to quantify.
      Bahrain Monetary Agency figures show regional currency
  deposits held by offshore banks, most in Saudi riyals, dropped
  to the equivalent of 12.2 billion dlrs at end-September 1986
  from 13.4 billion at end-1985 and a 1983 peak of 15.0 billion.
      The shift has prompted changes in dealing habits. Riyal
  trading in the Gulf on Saturdays and Sundays has become very
  quiet with London closed while some Saudi and Bahrain banks now
  staff offices on Friday, the Gulf weekend. Traders also expect
  &lt;Arab National Bank> to step up London operations.
      Traders say it is difficult to foresee the riyal market
  moving completely out of the region, partly because of local
  demand and partly because of what is seen as the Saudi Arabian
  Monetary Agency's (SAMA) desire to moderate
  internationalisation of the riyal and protect it from undue
  speculation.
      There have been far fewer signs of the Kuwaiti dinar market
  shifting from its natural base of Kuwait and trading in Bahrain
  and London is still limited.
      But for the first time since the formation of the six
  nation Gulf Cooperation Council (GCC) in 1981 there are signs
  that a much mooted currency union could come into force soon.
      Currency traders said it remains unclear what form a final
  currency union would take for the six states -- Saudi Arabia,
  Kuwait, Bahrain, Oman, Qatar and the United Arab Emirates.
      But plans to link the six currencies in a European Monetary
  System style with a common peg have been discussed at high
  level and could be a topic on the GCC's annual summit expected
  to be held in Saudi Arabia late in the year.
      One dealer said: "A lot of exposure is being given to
  discussions and plans appear to be quite advanced. But in the
  end a political decision has to be taken to give the go-ahead."
      One open question is that of a common peg for currencies.
      The idea of linking the six currencies has been debated
  since the start of the GCC. The Kuwaiti dinar is currently
  linked to a basket of currencies while the other five
  currencies are either officially or in practice linked to the
  U.S. Dollar.
      Some traders said a currency union could mean speculation
  against the Saudi riyal rubbing off on other Gulf currencies,
  but plans call for a permitted divergence in the system of
  7-1/4 pct, large enough to avoid sudden strains.
      Another topic for debate is expected to be the continued
  slide of the Lebanese pound against the dollar and the
  undermining of the effective capital base of Lebanese banks.
  

