[R-G] Saudi State Bank Urges Govt to Cut Dollar Exposure

[Yoshie Furuhashi]

<http://www.guardian.co.uk/feedarticle?id=7219869>
Saudi state bank urges govt to cut dollar exposure
* Reuters
* Saturday January 12 2008
(Updates throughout, adds details and background)

By Souhail Karam

RIYADH, Jan 12 (Reuters) - Saudi Arabia's largest state bank urged the
government to reduce the kingdom's exposure to the dolllar by
investing more assets outside the United states and gradually changing
the riyal's peg to the weak U.S. currency.

National Commercial Bank, Saudi Arabia's biggest by assets, said the
world's largest oil exporter should set up a sovereign wealth fund to
invest surplus revenues, now partly managed by the central bank, which
has $285 billion in foreign assets.

The bank's statement, prepared by its chief economist, is the latest
sign of pressure on the government to review exchange rate policy for
the first time since 1986. The central bank and officials have
repeatedly ruled out any policy shift.

"Time has come to reconsider the continued pegging of the Saudi riyal
to U.S. dollar, provided that this is done gradually, taking into
account the unfavourable impact on official reserves, which are mostly
denominated in dollars," said Said al-Shaikh, National Commercial's
chief economist.

The government should set up a sovereign fund to "increase the returns
on investment of most government surpluses, which are currently
invested in U.S. Treasury bonds", Shaikh said.

The kingdom should "diversify government investments across asset
types, countries and different currencies...to reduce risks and
increase profitability," he said.

Concerns that state investors, including those in Gulf oil exporters
would shift assets away from the dollar helped drive the U.S. unit to
record lows on global markets last year.

Saudi Arabia's neighbours are reducing dollar exposure.

Qatar's $60 billion sovereign fund cut its exposure to the dollar by
more than half over the last two years, the country's prime minister
said last year.

The Kuwait Investment Authority said it had doubled its asset
allocation for Asia to more than 20 percent of its portfolio and the
United Arab Emirates bank is planning to shift more reserves into
euros.

Saudi reserves are invested by the central bank and other state funds.

"The continuing weakness of the dollar and declining interest rates
would shrink returns achieved by these investments," Shaikh said.
"With the continuing rise of inflation rates, the real returns may
become less and even risk dwindling."

The dollar peg forces the Saudi central bank to track U.S. monetary
policy. The Federal Reserve is cutting interest rates and inflation in
the kingdom hit its highest in at least 12 years in October.

The U.S. dollar fell more than 10 percent against the euro last year
and more than 6 percent against the yen, driving up the cost of Saudi
imports from those countries and fuelling inflation.

Saudi officials including the finance minister and the central bank
governor have said they see the peg as a cornerstone of economic
stability. The central bank has held riyal's exchange steady at 3.75
to the dollar since 1986.

The kingdom is under growing pressure at home and abroad to change its position.

The United Arab Emirates, one of five Gulf countries preparing with
Saudi Arabia for monetary union, called in November for the region's
central banks to sever their dollar pegs as Kuwait did in May.

Last week, King Abdullah told economic planning authorities that
economic growth must go hand in hand with efforts to protect the
population's purchasing power.

A source familiar with Saudi currency policy told Reuters in November
that the kingdom could consider revaluing the currency but keep the
riyal pegged to the U.S. dollar.

(Reporting by Souhail Karam, Editing by Peter Blackburn)

--
Yoshie
<http://montages.blogspot.com/>