Abu Dhabi, the major Middle East financial center, says it's preparing to create a platform to launch exchange-traded funds.

In detailing plans on Thursday, Rashed Al Baloushi, the deputy chief executive of the Abu Dhabi Exchange (ADX), credits increasing ETF demand by retail and institutional investors in the Middle East for the exchange's decision to build an ETF-specific platform.

Across the Middle East, ETFs and other traded securities are proving more popular and catching the attention of exchanges. The Dubai International Financial Exchange (DIFX), as well as exchanges in Oman and Saudi Arabia, have also shown interest in adding ETFs.

The latest ETF plans are also part of ambitious efforts by many Middle East markets to diversify away from oil wealth and become true, global financial centers.

Earlier this year, the Abu Dhabi Securities Market signed a joint venture deal with NYSE Euronext. The United Arab Emirates' Borse Dubai and the Qatar Financial Authority bought large stakes in the London Stock Exchange last year, and DIFX inked a strategic deal with NASDAQ to develop its regional platform.

The Egyptian Stock Exchange has said it plans to list ETFs, stock and index futures and options, in the next year, and a major Egyptian bank already has plans to list an ETF on the primary Egyptian stock index (see story here.)

Baloushi made his comments while speaking at a brokerage conference in Abu Dhabi. ADX has been working with ETF consultants to study the success of ETFs in other global markets.

Across the globe, net sales of ETFs have been rising as net assets in traditional mutual funds have decreased. In Europe, for example, net sales into ETFs were $43 billion through the first seven months of the year, while traditional funds had outflows of $148.6 billion, according to Barclays Global Investors data.

The closest thing to an ETF market in the Middle East, at this point, is Turkey, where there are five ETFs from two asset managers, according to BGI.

-- this report was submitted by Eric Rosenbaum. He can be reached at: erosenbaum@indexuniverse.com

Today, we're fortunate to have Jeff Frankel, Harpel Professor at Harvard's Kennedy School of Government, as a guest blogger. His blog is here.

The possibility that some Gulf states, particularly the UAE, might abandon their long-time pegs to the dollar is getting increasing attention (from Martin Feldstein and Brad Setser, for instance). It makes sense. The combination of high oil prices, rapid growth, a tightly fixed exchange rate, and the big depreciation of the dollar against other currencies (especially the euro, important for Gulf imports) was always going to be a recipe for strong money inflows and inflation in these countries. The economic dynamism -- most striking in Dubai -- is admirable and fascinating, but also now clearly indicative of overheating. Indeed inflation, as predicted, has risen alarmingly. Among other ill effects, it is producing unrest among immigrant workers. An appreciation of the dirham and riyal is the obvious solution.

Most often discussed as an alternative to the dollar peg is a peg to a basket of major currencies. This would be an improvement. Kuwait, for example, made this switch a couple of years ago.

But a basket peg does not address the fact that when oil prices rise generally (not just against the dollar), as in recent years, monetary policy is constrained to be looser than it should be. Similarly, when oil prices fall generally (not just against the dollar), as in the 1990s, monetary policy is constrained to be tighter than it should be. A floating exchange rate would be the traditional alternative, on the theory that the currency would then automatically appreciate when oil prices rise and depreciate when they fall. But there are serious disadvantages to small open countries floating, such as the loss of a nominal anchor for monetary policy. Today's reigning orthodoxy is to add an inflation target as the new nominal anchor. But this doesn't solve the problem if the price index is the CPI, which gives little weight to oil, the biggest sector in production and exports.

I believe that a better solution would be to include the price of oil in the basket of currencies to which the Gulf currencies would peg. I have laid out the case elsewhere. (I call it PEP, for Peg the Export Price [pdf]) I was pleased to see recently that the Financial Times mentioned this option approvingly ("Dollar-pegged Out," July 7):

"The Gulf needs to peg to something. A first step (after revaluation) would be to peg to a basket of currencies that included the euro and the yen. A bolder step would be to include the price of oil in that basket, so that currencies would appreciate when oil is strong, and depreciate when it is weak."