Financial Fallout: Standard & Poor's downgrade of the US rating has raised questions about the wisdom of keeping a large portion of the Gulf's several trillion dollars of savings in US treasuries.
Gulf's US assets in firing line
Standard & Poor's downgrading of the US's credit rating has sparked questions about the wisdom of keeping a large portion of the Gulf's several trillion dollars of savings in US treasuries.
Yields on US Treasury bonds recovered during trading yesterday after tumbling to near record lows in recent days. But recent low yields mean holders receive smaller returns on their investment.
Continuing deadlock in resolving the country's budget deficit problems could have a further impact on bonds, say economists.
"The US is in a severe financial squeeze and no near-term prospect to get out so it's prudent risk management to diversify foreign reserves," said Dr Jarmo Kotilaine, the chief economist of NCB, Saudi Arabia's biggest bank.
Middle East oil exporters, including Gulf states, Iran and Iraq, held US$350 billion (Dh1.28 trillion) in US securities as of the end of June last year, according to data on the US Treasury department website.
But the figure for total holdings is difficult to determine as some Middle East investors are believed to buy US debt through foreign banks, which may not be taken into account in the data.
There are several reasons why investing in US treasuries makes sense for the region's central banks and sovereign wealth funds.
With most of the region's oil wealth already weighted in the greenback, investing in US treasuries and other US assets avoids the risk of losing value through exchanging savings into other currencies. Five of the six GCC currencies are linked to the dollar via currency pegs.
Historically, US securities have also been viewed as a haven asset because of their high credit rating compared with some other assets. S&P's downgrade on Friday moved the US from the top-tier rating of "AAA" to "AA plus".
In addition, US treasuries offer the most liquid and accessible bond market, making them attractive to investors across the world.
"US treasuries tick all the right boxes," said Dr Giyas Gokkent,the chief economist and head of research at National Bank of Abu Dhabi. "Are they liquid? Yes. Are they dollar denominated? Yes. Are they easy to get out of? Yes."
But he said one goal for regional central banks should be diversification of assets. Suitable alternatives are limited, however.
"The most logical alternative would be the euro but there's no euro sovereign bonds yet and even if there were Europe has its own problems clouding their attractiveness," said Dr Kotilaine.
The amount of holdings of US securities varies in the region. The UAE Central Bank said last month it held no US treasuries or any other US government financial instruments because of the "very low return".
Abu Dhabi Investment Authority, which holds a large part of the country's foreign reserves, is believed to hold some US treasuries as part of a portfolio diversified across asset classes and regions.
The sovereign wealth fund does not reveal the total amount of its funds or exact details about what asset classes or regions it has investments in. But between 10 and 20 per cent are in government bonds, according to data on its website.
Between 35 and 50 per cent of its assets are invested in North America, the data show.
The bulk of the 1.84tn Saudi riyals (Dh1.8tn) of foreign assets of the Saudi Arabia Monetary Authority (Sama), the kingdom's central bank, are believed to be in US treasuries.
Sama should "begin to diversify its portfolio in other currencies to mitigate risks", according to a recent NCB research report.