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, <Arab Banking Corp> and <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 <Riyad Bank> set up as a licensed deposit taker in London in 1984, while its main rival in Saudi Arabia, <National Commercial Bank> (NCB) won a licence in November 1986. The major market maker has traditionally been London-based consortium bank <Saudi International Bank> but the kingdom joint-venture <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 <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.