With the US continuing to battle economic woes, Riyadh should reconsider its portfolio of holdings
Four years ago, as the GCC enjoyed rampant economic growth, the financial world was abuzz with talk about depegging regional currencies from the dollar. Foreign money flooded into the region as speculators hoped to benefit from the revaluation of local currencies, despite little evidence it would occur. About a year later, most of this cash had exited as it became clear depegging was unlikely.
Now, with the US suffering from a lingering economic slump and the loss of its AAA credit rating from ratings agency Standard & Poor’s (S&P’s), the region could have good reason to abandon its allegiance to the dollar. In particular, the Saudi central bank’s strategy of holding most of its net foreign assets, which now exceed $500bn, in US government bonds has come under scrutiny after the ratings downgrade in early August.
However, undertaking a major restructuring in the way the kingdom maintains its foreign assets during a time of global financial uncertainty and regional political instability could prove disastrous for Riyadh. The dollar is still the reserve currency of the world and alternatives to US debt do not easily recommend themselves. Crucially, the S&P’s downgrade has not been followed by the other ratings agencies.
But against the backdrop of US and European debt woes, and with oil prices back to about $100 a barrel, it might be time for Riyadh to consider a more diversified portfolio of holdings.