Oman's central bank does not hold any agency debt of US mortgage giants Fannie Mae and Freddie Mac and the Gulf country has no plans to acquire any, its deputy chief said yesterday.
Most states in the world's biggest oil-exporting region, including Saudi Arabia, peg their currencies to the ailing dollar and their central banks invest heavily in US-dollar denominated assets.
Mohammed Al Jahdhamy said while he was unaware of the region's total exposure to agency debt of the United States mortgage lenders, he did not expect the US financial turmoil to hurt Gulf economies that are surging on record oil prices.
"The Central Bank of Oman does not have any investments in the debt papers of Fannie Mae or Freddie Mac," Jahdhamy, executive vice-president of Oman's central bank, said.
The central bank's foreign reserves amounted to four billion rials (Dh38.1bn) at the end of March.
Total Gulf central bank foreign exchange reserves were about $156bn at the end of February.
"For the present, our investments are confined to sovereign papers, such as US treasury bills and bonds, and we do not contemplate moving into agency debt issuances in the near future," Jahdhamy said. Foreign central banks are dominant holders of Fannie Mae and Freddie Mac debt, which have traditionally been regarded as relatively low risk even though the US government does not explicitly guarantee it.
Concerns that the two firms commanding just under half of the country's $12 trillion in outstanding mortgage debt might run out of capital as house prices tumble prompted the government to pledge help this week. "I have no idea of the exposure of the Gulf states to US agency debt," he said.
"We also do not see US developments as having an adverse impact on the region since there has been strong growth on the basis of high domestic liquidity in the Gulf," he said.
Gulf central banks probably have at least some exposure to US agency debt, but are unlikely to disclose details of their foreign exchange holdings, analysts said. "The ultimate risk is that these are not paid. I think this is an unlikely risk because these institutions have implicit backing of the US government," said Giyas Gokkent, head of research at National Bank of Abu Dhabi.
Gulf states, meanwhile, are well-positioned to weather the US economic downturn, Jahdhamy said. They have been investing windfall oil revenues into infrastructure, real estate and industry to diversify their economies away from oil.
No change in dollar peg
The Gulf Co-operation Council countries are unlikely to de-peg their currencies against the US dollar despite mounting economic pressure on the regional governments to de-peg, Swiss banking giant UBS said in a note yesterday.
"The leaders in the region will de-peg their currencies at a time the dollar is under stress, as it is now"; "politics has a different calling from economics, and politicians in the region may be able to ignore economic logic in the short term," the note said.
Forward points in GCC currencies were "shaken up" on Tuesday on news that Saudi Arabia's Shura – advisory council to Saudi government – may recommend currency gains as one way to tackle inflation.
Economic pressure on GCC currencies is obvious as inflation in Saudi Arabia reached 10.6 per cent in May.