UAE Central Bank Governor: Gulf approach to U.S. debt unchanged

ABU DHABI: Gulf Arab central banks still regard U.S. Treasuries as a safe investment and the United Arab Emirates may consider diversifying reserves to include China’s yuan, the UAE Central Bank governor said Wednesday.

Gulf states, which mostly peg their currencies to the U.S. dollar, are major holders of Treasuries and other U.S. assets, with oil – priced in dollars – their major source of revenue.

Asked whether the UAE was considering changing its policy on buying U.S. government bonds after a bill to increase the United States’ debt issuance limit was defeated in Congress, Sultan Nasser al-Suweidi said: “No, there is no change.”

“For the time being, I do not think there is a strong move in GCC [Gulf Cooperation Council] countries following Asian central bank investment policies,” Suweidi said on the sidelines of a financial workshop in the UAE capital.

The UAE Central Bank re-started purchases of foreign securities in May 2010, after reducing its holdings to almost zero following the 2008 global financial crisis.

It held 80 billion dirhams ($22 billion) worth of foreign paper in March, almost 44 percent of its total reserves, slightly down from 82.1 billion dirhams in February, data show.

“It is a treasury department policy. There are guidelines that are reviewed from time to time. If there is a need to move into Treasuries in a bigger way that would be discussed and decided,” Suweidi said.

U.S. lawmakers defeated Tuesday a bill to raise the $14.3 trillion debt limit without conditions. So far, markets are little concerned by the possibility of default on what is viewed as one of the world’s safest investments.

Asian central banks have stepped up purchases of dollar-based foreign reserves to combat currency appreciation and keep exports competitive.

Asked if the UAE, the world’s No.3 oil exporter, might consider diversifying reserves into the Chinese yuan, Suweidi said it depended on China relaxing its currency controls.

“It depends on the Chinese themselves because they are not yet prepared to allow the yuan to be a reserve currency,” he said. “If China relaxed controls then that will go to the investment committee within the treasury department of the Central Bank and then they will make a decision.”

The market mostly assumes that convertibility of China’s yuan is some years off, but the currency has gradually grown more accessible and there have been signs of Asian central banks showing an interest in buying yuan-denominated bonds.

Trade between the six Gulf Arab countries – the UAE, Saudi Arabia, Kuwait, Qatar, Oman and Bahrain – and China stands at around $100 billion, the UAE foreign minister said in May.

Suweidi earlier told the workshop that the OPEC member needs to increase efforts to create a local debt market.

“As for liquidity, the difficulty lies in the fact that there are no sufficient government debt instruments. It will be important to double efforts locally to create an active market for government bonds as well as high quality corporate bonds,” he said.

The UAE is in the final stages of approving a law that will allow the Gulf state to issue its first ever federal sovereign bonds and create a local debt market.

A version of this article appeared in the print edition of The Daily Star on June 02, 2011, on page 5.




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