By Camilla Hall
The Abu Dhabi-based central bank of the United Arab Emirates made an unusual public announcement last week. It said it had no US Treasury bills in its reserves, nor any other financial instrument issued by the US government.
The decision not to invest in US government debt was ?due to the very low return?, the central bank said in the statement carried by the state news agency.
?Despite the fact that the central bank foreign reserves are mostly denominated in dollars, they are invested mostly in non-US assets. Eventually these investments are not obligations on the US government,? it said.
?There is no direct link between the dollar-denominated assets and the US government debt.?
The statement came as US politicians struggled to agree a raising of the federal debt ceiling and as rating agencies said the country?s triple A rating was under threat. Agreement has now been reached in Washington but rating agencies have intimated that the US sovereign rating remains under review.
Back in the UAE, economists have been taken aback by the central bank statement because the dirham is pegged to the dollar, making holding US government debt an obvious choice.
?It?s surprising; one would expect the majority of reserves to be in US government debt instruments,? says Marios Maratheftis, an economist at Standard Chartered in Dubai. ?It?s not a high return – but it?s the most liquid.?
The statement also raises the question of what the central bank is invested in. Since May last year it has built up its held-to-maturity foreign assets, which total $23bn, according to data on its website. The bank?s total foreign currency assets equate to $54bn.
?There are two possibilities: either that they?ve gone down the rating scale – I would assume that?s unlikely – or the other is to hold bonds of government-related entities that may yield higher interest. I suspect that?s probably what they?ve done,? says Giyas Gokkent, chief economist at National Bank of Abu Dhabi.
Although the UAE?s assets are still denominated in dollars, other currencies are emerging as the new global haven currencies, according to JPMorgan. ?The Swiss franc and yen are the ultimate safe-haven currencies these days, especially the former,? JPMorgan said in a report this week.
No one in the UAE central bank treasury department was available for comment but a person close to the bank says a decision was made last year to invest reserves in Japanese dollar-denominated debt.
The bank may have been tempted by bonds issued by the Japan Bank for International Co-operation, for example, which come with a Japanese government guarantee. Those sold in January last year offered a coupon of 2.85 per cent.
Economists point out that the central bank?s comments do not apply to the UAE?s sovereign wealth funds, which hold most of the state?s assets.
However, since the central bank has manoeuvred out of the US dollar, the question may be asked whether funds such as the Abu Dhabi Investment Authority have also done, or are considering doing, something similar.
?The central bank assets form a small part of the UAE?s net foreign asset position, with a larger proportion held with sovereign wealth funds,? says Monica Malik, chief economist at EFG-Hermes bank.
?There is a possibility that some US Treasury paper is held at the sovereign wealth fund levels, even if it is not at the central bank.?
In the same statement the UAE affirmed its commitment to the dollar peg.
Doubt was cast over this currency link, which has been in place for decades, in 2008 when domestic inflation put pressure on Gulf states to drop their links to the dollar and allow a more flexible monetary policy.
? The Financial Times Limited 2011
