Gulf must diversify reserves says cbanker
Dubai, June 9, 2011
Gulf central banks' reserves should be more diversified in the long run, and any US debt default would put downward pressure on the dollar and fuel inflation, a Gulf central banker said on Thursday.
Gulf Arab crude exporters, which mostly peg their currencies to the dollar, are major holders of Treasuries and other US assets, with oil -- priced in dollars -- their main source of government income.
"(The default risk) is a concern for countries that have investment denominated in the US dollar. It will lose value," Khalid Alkhater told Reuters.
"Secondly, ... this will put more downward pressure on the US dollar exchange rate against other major currencies so there will be more inflationary pressure."
Inflation in the Gulf, which relies on imports for most of its food needs, has been mostly holding in low single digits this year, peaking in Kuwait at 5.3 percent in April.
But analysts expect more price pressures in the coming months, stemming from higher food costs, a weak dollar and increased government spending in the wake of regional unrest.
A growing number of Republican lawmakers in the United States think a technical debt default might be worth trying to get the White House to accept deep spending cuts.
That stance has drawn criticism from across the globe, though markets see little risk of a default.
China, the biggest holder of US assets, said on Wednesday the lawmakers were "playing with fire" by eyeing even a brief default as a tool to force budget cuts.
In Oman, one of six Gulf Arab states, the central bank has started to discuss a potential US debt default and fears such a move would, at least briefly, destabilise Gulf foreign asset reserves, a senior official said on Wednesday.
Asked whether the default risk was going to affect the reserve policy of Gulf central banks, Alkhater said: "Regardless of this issue, my opinion always was that countries should diversify. "They should diversify their portfolio more and more in the long run," he said.
The Kuwait and Bahrain central banks declined to comment and central banks in Saudia Arabia, the United Arab Emirates and Qatar gave no reply on the issue.
Financial markets are following the US debate but see little threat of a default. US Treasury debt prices pared early gains on Thursday to trade relatively steady.
UAE central bank governor Sultan Nasser al-Suweidi said last week that Gulf Arab central banks still regard US Treasuries as a safe investment and there was no change in their policies.
Central banks in the Gulf, the world's top oil-exporting region, usually do not disclose details of the composition of their foreign currency reserves and discussing reserve policy is a sensitive issue in the US-allied region. - Reuters