Letter of credit (L/C) business will be affected if the United Arab Emirates (UAE) revalues its currency according to a recent report.

The report by investment bank EFG-Hermes reckons the UAE will revalue its dollar-pegged dirham since the federation's booming economy is seriously out of kilter with the US' troubled economy.

Banking growth

In its UAE Research Yearbook 2008, the Cairo based investment bank says the country's banking sector stands to gain this year because the general outlook for the economy in 2008 is rosy.

"The sector is expected to see expansion and consolidation, with more domestically focused banks looking towards consolidation and larger banks engaging in expansion across the Mena region," the report says.

Revaluation prospects

Economists generally agree that the UAE is very likely to revalue its currency, possibly in the first half of the year.

Since UAE banks have little transnational exposure, EFG-Hermes reckons this will not have a substantially negative impact on the banking sector, but a revaluation would have a major impact on trade finance business, primarily L/Cs and guarantees.

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