UAE STATEMENTS RE INCREASING RESERVES OF EUROS -

C O N F I D E N T I A L ABU DHABI 002913 SIPDIS SIPDIS STATE FOR NEA/ARP, EB/IFD/OMA TREASURY FOR U/S QUARELS, RAMANATHAN E.O. 12958: DECL: 07/17/2016 TAGS: EFIN EINV ETRD ECON AE SUBJECT: UAE STATEMENTS RE INCREASING RESERVES OF EUROS - NOTHING NEW REF: ABU DHABI 1472 Classified By: Ambassador Michele J. Sison for reasons 1.4 b and d. ¶1. (C) The UAE Central Bank is unlikely to move 10 percent of UAE reserves from dollars to Euros in the near future, despite Governor Sultan Nasser Al-Suweidi's July 14 public comments to the Financial Times indicating the UAE would move 10 percent of its $29 billion foreign exchange reserves. The Governor did not indicate any timetable for converting the reserves, saying the timeline was still under discussion. Abed Alla Usama Malki, Economic Advisor to the Governor, told EconChief on July 15 that to his knowledge the Central Bank is not planning on shifting reserves any time soon. Malki told Econchief that the Central Bank's Investment Committee assesses the Euro as overvalued in relation to the dollar, and thus shifting reserves into Euros would not make economic sense. (Note: According to the Central Bank Governor in March, over 98% of the Central Bank's reserves were in dollar denominated assets (reftel). End note.) According to Malaki the "European lobby has been pressing the UAE hard for some time to put more money into Euros." He noted that the Governor made the statements to the Financial Times in London on the margins of the Bank for International Settlements conference and that "the Governor often makes these sorts of statements to placate the Europeans." ¶2. (C) In the article, the Governor also argued that there was no need for the UAE to change its dollar peg, despite some complaints that the drop in the dollar is causing inflationary pressure. Malki told EconChief that UAE was not likely to revaluate the currency as Kuwait had done. He explained that revaluation would require GCC agreement, noting that when Kuwait agreed to peg to the dollar, in preparation to creating a common GCC currency in 2010, it maintained a margin for adjustment, which the other countries did not. Malki also noted that around 2/3 of the UAE's imports and nearly all of its exports come from countries pegged to the dollar, so a peg made sense and revaluation was not a priority. The Governor did tell the Financial Times that he believed that after the GCC moved to a common currency in 2010, it would make sense to move to a floating exchange rate, which tracks with comments he has made privately to USG officials. ¶3. (C) Comment: In the past, Al-Suwaidi has told us of his belief that the dollar peg has served the UAE well and his general disinclination to rebalance reserves into Euros (reftel). Given the UAE's trade and investment flows, it is likely that it would maintain large dollar reserves in any case. In March, Al-Suwaidi publicly said that the Central Bank would shift 10 percent of its reserves into Euros, but has not yet acted. It does not appear that his latest statement indicates any rapid move, but it does placate interest groups and maintains the Central Bank's flexibility to act in the future. End Comment. SISON