00:00Our next guest says the UAE's inquiry about a currency swap with the U.S. is more about taking out
00:05an insurance policy rather than a sign of a fiscal crisis.
00:09The Emirates informally inquired about potential financial lifelines, including a currency swap, if the economic and financial impact of the
00:16war worsens.
00:17President Trump said last week that a deal was under consideration, calling the Gulf nation a good ally.
00:22For more on this, let's bring in Hasnan Malik, Managing Director for Emerging Market Equity and Geopolitical Strategy at Telemer.
00:29Good to have you with us. I am going to ask you the question everyone has been asking since the
00:33story emerged.
00:34Why would the UAE ask the Fed or the U.S. for a swap line?
00:41Well, normally a swap line is requested by a country in, to a degree, a state of crisis.
00:48I think it's very hard to describe that as a state that exists in the UAE today.
00:54Clearly, the war is having a damaging impact.
00:56So, tourism levels are down.
00:58Your previous segment discussed how real estate prices have suffered.
01:02Trade and transport through the region clearly is down with the blockade of Hormuz and the lower demand for air
01:08travel through the city.
01:10But, you know, two things.
01:12One, if you look at the level of foreign reserves, so liquid foreign reserves, put sovereign wealth to one side.
01:18Liquid foreign reserves are still very high, were very high coming into this war.
01:22You know, almost covered the entirety of non-resident bank deposits, almost the entirety of the money supply, if narrowly
01:29defined, in terms of M1.
01:31And so the question is, as you put, you know, why request this?
01:34I think this is much more about putting in place a backstop, a buffer for liquidity in case required.
01:43You know, if you go back and you look at the drivers of the war, you have Iran on one
01:47side, the U.S. on the other,
01:48neither of which appear to be in a hurry to bring this war to an end, and specifically to reopen
01:53Hormuz.
01:54If Hormuz would have remained shut for another two weeks, four weeks, six weeks, that clearly drives pressure on liquidity
02:01and the liquidity specifically in U.S. dollars.
02:05Much better to make that request right now from a position of strength than when there is a real moment
02:10of crisis down the line.
02:13So would you describe it as insurance against the worst case scenario then?
02:19Absolutely. It's preparation for what happens if the Hormuz straight is still blocked in two months' time.
02:26If we're sitting here in June and we still don't have a restoration of trade, then there will be pressure
02:31on the need to make payments and the access to cash flow.
02:34That's why now is a good time to make that request, not when you get to that stage in, let's
02:39say, May or June.
02:42Okay, I take your point on solvency versus liquidity, and we know that these are wealthy nations.
02:49The Gulf nations are wealthy nations, so the asset wealth is actually there.
02:53Do you see a real risk of a dollar shortage emerging in the coming months?
03:00I think no one could have imagined coming into this year that we'd have two months where the Hormuz straight
03:06was blocked.
03:08So we've got to be realistic, and we have to have a pessimistic scenario built in where maybe that blockade
03:14lasts for another two or three months, as I say,
03:16because neither protagonist, the U.S. or Iran, and for that matter Israel as well, appears to be in a
03:21hurry to resolve this.
03:22That's why the groundwork has to be put in now in case that worst scenario materializes.
03:28Now, if it does, all of the GCC states, with perhaps the exception of Bahrain, have the financial wherewithal to
03:35get through this.
03:36But the question is, how do you mitigate the damage?
03:39Part of mitigating the damage from the UAE's perspective is getting in place this sort of currency swap,
03:44which will alleviate any concerns in the market about dollar availability
03:48and certainly reduce the risk of any payment delays to suppliers who require payment in dollars.
03:56Yeah, I guess one of the other questions people are asking is, is it becoming more difficult for these Gulf
04:03nations to defend the currency pegs that they have in place versus the USD?
04:10Well, when it comes to the currency peg, it depends a little bit on how you come out as an
04:14answer to your first question,
04:16which is if the swap is being requested in a moment of crisis, then there would naturally be a question
04:21over the sustainability of the currency peg.
04:23If, on the other hand, you're in my camp, which is that, no, this is an insurance policy for the
04:28very worst case scenario,
04:30then I don't think there's any risk to the pegs over a, let's say, one to five year view.
04:34As long as we do ultimately get the reopening of Hormuz, as long as, particularly for the UAE and Saudi
04:41Arabia,
04:41there are alternate supply exit routes for oil exports, then you should still get the cash flow coming in from
04:48the oil industry.
04:50Take one step back as well and look at actually how resilient the non-oil sector has been.
04:56You know, yes, real estate pricing has gone down, but it hasn't come to a halt.
04:59Long haul air travel connecting via hubs like Dubai, Doha and Abu Dhabi is still going on,
05:05even if tourism is, if tourists are not stopping over in these markets.
05:09And you look at the banks, the banks reported in Q1, giving you no evidence whatsoever
05:14that there were signs of distress despite an entire month where the war took place.
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