Geithner in the Gulf: US Economic Diplomacy in the Middle East
Treasury Secretary Geithner will visit Saudi Arabia and the United Arab Emirates (UAE) in mid July as part of a trip to talk with key partners before the G20 meetings (Saudi Arabia is the only Arab member of the group). Key topics on the agenda likely to be the enforcement of sanctions towards Iran, including the possibility of deeper sanctions, investment in the US, transparency of sovereign wealth funds (UAE has among the largest globally) as well as discussion on the long-term fiscal plans of the U.S. with these key US creditors. US trade and investment with the UAE has been climbing and is largely in non-oil areas.
GCC as US Creditor
The GCC countries may have among the largest stocks of USD assets after China and Japan, in both public and private hands. Over 60% of the estimated $1.1 trillion in assets managed by the sovereign funds and central banks of the GCC in June 2009 are US denominated including US stocks and bonds. Saudi Arabia and the UAE each account for over $400 billion of these assets. While the Stocks of GCC foreign assets are quite large, both public and private investments abroad suffered significant paper losses in 2008, and credit shortages at home and rising fiscal burdens have led many of these funds to invest more heavily at home. As such like China, these major creditors of the U.S. are interested in the long-term fiscal sustainability of the US as it will affect the value of their U.S. assets (RGE Monitor's Rachel Ziemba)
USD Pegs
As long as the GCC countries continue to peg to the U.S. dollar, they will be restricted in their attempts to diversify their assets away from the US dollar. Even Kuwait which depegged in 2007, maintains an above 70% dollar share. Abu Dhabi and Kuwait were able to partially diversify their positions in 2005-7, but the dollar is still a majority.Saudi Arabia's large stock of treasuries may be difficult to diversify
These pegs were tested in late 2007 and early 2008 as dollar depreciation and rising global inflation led investors to bet on revaluation. This policy option is now off the table. In fact the long-deferred GCC monetary Union, which will not come into being until at least 2013 anticipates retaining the dollar peg for some time. This union may only include 4 members as the UAE pulled out (Oman had previously deferred entry) and the economic crisis has exposed policy differences.
Woertz: maintaining dollar pegs less important than their continuing financing of the US deficit. There is a relationship of financial mutually assured destruction between the US and its creditors in Asia and the Gulf
Treasury Secretary Paulson visited the GCC in 2008. Top of agenda, transparency for SWFs measures to limit terrorist financing but the big underlying issue was dollar pegs and purchase of US assets.
GCC countries have insisted that they will retain dollar peg despite costs (inflation, dollar reserve accumulation to counter speculative inflows); significant currency diversification by GCC funds could be negative for the dollar
http://www.rgemonitor.com/
Treasury Secretary Geithner will visit Saudi Arabia and the United Arab Emirates (UAE) in mid July as part of a trip to talk with key partners before the G20 meetings (Saudi Arabia is the only Arab member of the group). Key topics on the agenda likely to be the enforcement of sanctions towards Iran, including the possibility of deeper sanctions, investment in the US, transparency of sovereign wealth funds (UAE has among the largest globally) as well as discussion on the long-term fiscal plans of the U.S. with these key US creditors. US trade and investment with the UAE has been climbing and is largely in non-oil areas.
GCC as US Creditor
The GCC countries may have among the largest stocks of USD assets after China and Japan, in both public and private hands. Over 60% of the estimated $1.1 trillion in assets managed by the sovereign funds and central banks of the GCC in June 2009 are US denominated including US stocks and bonds. Saudi Arabia and the UAE each account for over $400 billion of these assets. While the Stocks of GCC foreign assets are quite large, both public and private investments abroad suffered significant paper losses in 2008, and credit shortages at home and rising fiscal burdens have led many of these funds to invest more heavily at home. As such like China, these major creditors of the U.S. are interested in the long-term fiscal sustainability of the US as it will affect the value of their U.S. assets (RGE Monitor's Rachel Ziemba)
USD Pegs
As long as the GCC countries continue to peg to the U.S. dollar, they will be restricted in their attempts to diversify their assets away from the US dollar. Even Kuwait which depegged in 2007, maintains an above 70% dollar share. Abu Dhabi and Kuwait were able to partially diversify their positions in 2005-7, but the dollar is still a majority.Saudi Arabia's large stock of treasuries may be difficult to diversify
These pegs were tested in late 2007 and early 2008 as dollar depreciation and rising global inflation led investors to bet on revaluation. This policy option is now off the table. In fact the long-deferred GCC monetary Union, which will not come into being until at least 2013 anticipates retaining the dollar peg for some time. This union may only include 4 members as the UAE pulled out (Oman had previously deferred entry) and the economic crisis has exposed policy differences.
Woertz: maintaining dollar pegs less important than their continuing financing of the US deficit. There is a relationship of financial mutually assured destruction between the US and its creditors in Asia and the Gulf
Treasury Secretary Paulson visited the GCC in 2008. Top of agenda, transparency for SWFs measures to limit terrorist financing but the big underlying issue was dollar pegs and purchase of US assets.
GCC countries have insisted that they will retain dollar peg despite costs (inflation, dollar reserve accumulation to counter speculative inflows); significant currency diversification by GCC funds could be negative for the dollar
http://www.rgemonitor.com/