No exposure to US debt: UAE

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No exposure to US debt: UAE

DUBAI - A looming US debt default may not have any immediate repercussion on the UAE economy, but the crisis might further dent the value of dirham that is pegged to a sinking dollar, further fuelling domestic inflation.

By Issac John

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Published: Fri 29 Jul 2011, 8:23 AM

Last updated: Tue 7 Apr 2015, 4:40 AM

The UAE Central Bank, in a bid to soothe public fears about the negative implications of a possible US default on the UAE economy, said on Thursday it was not presently holding any US treasury bonds or any other financial instruments issued by the US government “due to the very low return on holding such instruments.” The Central Bank added that it was confident that the US officials would meet the August 2 deadline on raising the country’s $14.3 trillion debt ceiling.

Seeking to ally widespread concern on the dollar-pegged dirham, which has lost ground against a vast array of currencies, the apex bank reiterated that the dirham’s peg to the dollar was “steady and consistent” although the greenback “is exposed to price fluctuations as it happen with all major currencies.”

The Central Bank said it was confident US officials would meet the deadline to reach an agreement on raising the country’s debt ceiling.

“We believe that the debate on the US public debt ceiling issue will end with a compromise solution before the deadline date,” the regulator said in a statement.

But analysts believe several other Gulf investment entities, which have reportedly invested an estimated $1 trillion in US Treasury notes and bonds, would have to face the impact of the impending debt default. The Saudi central bank alone holds $497 billion in US notes.

However, the UAE Central Bank said despite the fact that its foreign reserves are mostly denominated in US dollar, they are invested in non-US assets. The regulator maintained that there is no direct link between the dollar-denominated assets and the US debt.

“We do not believe that it is necessary to imagine that the US government may default on its debts given its enormous potential,” the statement added. Analysts said any failure by the US Congress to reach a debt deal would make the GCC nations rethink of pegging their currencies to the tumbling dollar. As five of the six GCC currencies are pegged to the dollar, any serious economic setback in the US would almost certainly weaken local currencies.

Record low US interest rates and current debt worries have shaved nine percent off the dollar value since 2010. Since the dirham is pegged to the greenback, the value of the UAE currency also fell by a corresponding rate, further eroding its purchasing value and exacerbating imported inflation. The plummeting exchange rate of the Gulf currencies has hit the remittance capacity of millions of Gulf expatriate workers. As global investors lose faith in the dolar as the world’s reserve currency, Asian central banks, among the world’s biggest dollar holders, have become steady buyers of alternatives to the dollar such as the Singapore dollar and other Asian currencies as well as the Canadian, Australian and New Zealand dollars.

Two of the top-rating agencies in the world have already warned that they would strip the US of its prized ‘AAA’ rating if the debt ceiling is not increased. China, the US’ largest creditor called on the US to protect the interest of its investors because they also realize that a ratings downgrade can have a cataclysmic effect on the US dollar and in turn the value of their portfolio.

Of the current $14.29 trillion US debt, $8.1 trillion is publicly held and $6.2 trillion is held by the US government. Of the publicly held debt, China with $1.3 trillion dollars is the largest buyer and holder of US Treasury bonds.

Yusuffali MA, who is managing director of Emke Group, and member of the board of directors of Abu Dhabi Chambers of Commerce and Industry, said clarification on dirham’s peg to US dollar “will boost investors’ confidence and bring more stability in the market, as the majority of businesses in the UAE, use US dollar for their import and exports.”

M.R. Raghu, Senior Vice President-Research at Kuwait Financial Centre, said “dollar denominated assets will suffer huge erosion in value as a result. But that is unlikely situation and can be a “black swan: event!”

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