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