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UAE Central Bank governor says US Treasuries unattractive

UAE's Al-Suwaidi sees UAE 2011 GDP at 3.5-4 percent; Expects UAE inflation lower than 3 percent

June 27, 2011 12:09 by

The UAE prefers to use dollar-based instruments such as deposits rather than low-yielding US Treasuries to manage foreign reserves, its central bank governor said on Sunday.

Sultan Nasser Al-Suwaidi also told Reuters in an interview on Sunday that he expected the UAE economy to grow by up to 4 percent this year, driven by the tourism and trading sectors.

Concerns over US Treasuries, one of the favourite instruments for the world’s central banks in managing reserves, are rising as US politicians must reach a deal to raise the debt limit and avoid a potential default on the country’s $14.3 trillion debt by August 2.

Talks fell apart on Thursday as Republicans walked out over Democrat demands for tax increases as part of a deficit cut plan.

Asked how much in US Treasuries the UAE central bank held as part of its reserves, Al-Suwaidi said: “Not much.”

“US Treasuries have two problems. The rate is very low and if you want to sell … you have to sell at a large discount. It’s liquid, but for liquidity you have to pay a price,” he said on the sidelines of the Bank for International Settlements annual meeting.

The UAE central bank holds nearly all its foreign reserves, around $33 billion, in US dollars with no euros on its balance sheet, Mohamed al-Tamimi, deputy executive director at the central bank’s treasury department told Reuters this month.

Rating agency Fitch has said it would place the US credit rating on watch negative if its debt ceiling was not raised by Aug. 2.

Central banks around the world have held US Treasuries for their liquidity and safe-haven status but Al-Suwaidi said the UAE has traditionally owned other instruments, mainly in dollars given its peg to the US currency.

“You have many instruments you can put your money into. In reality some instruments are equal to U.S. Treasuries, in practice, like deposits. The largest exposure is to U.S. dollars, but to be in U.S. dollars you don’t have to hold US Treasuries.”

Al-Suwaidi said UAE economic growth would rise to up to 4 percent from last year’s estimated 2.2 percent, in spite of political turmoil in the Middle East and North Africa.

“This year we’re talking about a growth rate of 3.5-4 percent. Where is growth coming from? It’s coming from the tourism sector, and trading sector and manufacturing,” he said.

“We have normal (capital) flows in and out, therefore we haven’t seen any effect in this direction from (uncertain) regional conditions.”

Neighbouring Bahrain suffered after the Sunni government used tanks to crack down on mainly Shi’ite-led protesters.

Around 24 people died in a month of unrest which brought in Saudi troops, closed banks and shops and triggered capital flight. Economic losses reached $1 billion, or about 20 percent of quarterly gross domestic product, according to NCB Capital estimates.

Al-Suwaidi said price pressures were moderate in the domestic economy given supply overhang in the property sector.

“Personally I think inflation will be lower than 3 percent. I don’t want to put a figure on it, because the real estate sector continues to be under pressure and we expect it to be under pressure for several years to come.

“Supply — housing units and office space — will continue to come into the market at a lower rate.” (By Natsuko Waki; Editing by David Hulmes)

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