Thursday, Jun 02, 2011
Gulf News
Abu Dhabi: The UAE may consider diversifying its foreign currency reserves to include Chinas yuan, but before that, China will have to relax its currency controls, UAE Central Bank Governor Sultan Bin Nasser Al Suwaidi said here yesterday.
It depends on the Chin-ese themselves because they are not yet prepared to allow the yuan to be a reserve currency. They have tremendous control over their currency. If China relaxed controls, then that will go to the investment committee of the Treasury Department of the Central Bank and there, they will make the decision, Al Suwaidi told reporters.
Al Suwaidi was talking on the sidelines of an Arab Monetary Fund workshop on strengthening financial regulations in the Middle East and North Africa (MENA) .
Al Suwaidi said that unlike some Asian central banks, the central banks of the Gulf Cooperation Council (GCC) countries havent markedly stepped up purchases of dollar-based foreign reserves for the time being.
I dont think theres a strong move in the GCC countries to follow the Asian [central] banks investment policies, he said.
As far as the UAE is concerned, Al Suwaidi said: Its a Treasury Department policy. There are guidelines we have put that are reviewed from time to time. If theres a need to move into treasuries in a bigger way, that would be discussed and agreed.
Gulf countries, which mostly peg their currencies to the US dollar, are major holders of treasuries and other US assets, with oil, priced in dollars their major source of revenue.
Foreign securities
According to Reuters, 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 Dh80 billion worth of foreign paper in March, almost 44 per cent of its total reserves, slightly down from Dh82.1 billion in February, data show.
Asked whether the UAE would continue to subscribe to new US government bonds after a bill to increase the United States debt issuance limit was defeated in Congress, Al Suwaidi said: That is subject to review by the investment committee of the Treasury Department. I dont say no because the answer is with the Treasury Department.
US lawmakers defeated on 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 the worlds safest investments. Earlier, speaking at the financial workshop, Al Suwaidi said the UAE needs to double efforts to create a local market for government and corporate bonds. When it comes to adequacy and quality of capital, we dont have any difficulty in securing capital adequacy in the short run, he said.
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, Al Suwaidi added.
The UAE is in the final stages of approving a law which will allow the Gulf state to issue its first ever federal sovereign bonds and create a local debt market, the Finance Ministry said in May.
Asked about the mismatch between Emirates Interbank Offered Rate (EIBOR) and the banks high lending rates to businesses, Al Suwaidi said: This is a market condition, which will correct itself by itself.
By Himendra Mohan Kumar, Staff Reporter
Gulf News 2011. All rights reserved.
