The United Arab Emirates' central bank said it was confident there will be a compromise to avert a US debt default by an Aug. 2 deadline, adding that it holds no US Treasury bonds or US financial instruments. Public comment on the US crisis has been scarce from Gulf central banks and sovereign wealth funds, some of whom are major holders of US Treasuries and other dollar assets. Any sign of concern that would lead to institutions in the region dumping those assets to protect themselves would be likely to alarm financial markets more broadly. "We believe that the debate on the US public debt ceiling issue will end with a compromise solution before the deadline date," the UAE central bank said in a statement. "We do not believe that it is necessary to imagine that the US government may default on its debts given its enormous potential, and we had seen in the past under (former) President Clinton, the US economy's ability to reduce its public debt." The UAE central bank reiterated its support for its currency peg to the US dollar. It said a majority of its foreign reserves, denominated in US dollars, were invested in non-US assets. "Central Bank of the UAE currently possesses no US treasury bonds or any other financial instruments issued by the US government due to the very low return on holding these instruments," it said. The UAE central bank held AED199.1 billion ($54.2 billion) in total foreign currency assets at the end of June, of which 56.5 percent in the form of deposits, 25.7 percent in held-to-maturity foreign securities, and 222.2 percent in other foreign assets. UAE Central Bank Governor Sultan Nasser Al-Suwaidi said recently that he expected the UAE economy to grow by up to 4 percent this year, driven by the tourism and trading sectors. 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 US Treasuries, in practice, like deposits. The largest exposure is to US dollars, but to be in US dollars you don't have to hold US Treasuries," he said. The UAE central bank has "not much" in US Treasuries because "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 in Basel, Switzerland. "The central bank of the UAE's foreign reserves are around $56 billion. Out of that $10 billion is Dubai government bonds...," Giyas Gokkent, chief economist at the National Bank of Abu Dhabi. "With the small portfolio, they are able to ignore the US treasury market because it is not as large. If it was larger the central bank would have no choice but to invest as well. It makes perfect they say that it is a very low return, which is true."
