The Institute of International Finance (IIF) stated that the Gulf Cooperation Council (GCC) countries have begun a slow trend of diversifying their economies away from the U.S. dollar. They are increasing bilateral trade with countries other than the United States, most notably India and China.
Trade between countries
In a report, the IIF stated that the United States remains the GCC’s most important geopolitical and military partner. However, it lags far behind China and the European Union (EU) regarding trade. Moreover, the report added that China is now the region’s largest trading partner by a large margin.
While trade is still mostly conducted in U.S. dollars, GCC countries are signing bilateral agreements allowing trade using other currencies.
Additionally, the IFF noted that the West is tightening its grip on Russian oil. Subsequently, this increases the settlement of oil sales in currencies of Russia-friendly countries, mostly in the yuan and ruble.
The IIF cited statements that the Saudi Finance minister made in January 2023. He stated that the Kingdom was open to using other currencies to settle oil futures, although that has not happened yet.
However, the IIF expects this shift to be limited in scope because all GCC currencies are pegged to the dollar, which provides a basis for financial stability in the region.
The IIF also noted that the currency component of GCC assets held by international settlement banks remained unchanged by about 80 percent. This indicates that there has been no radical change.
U.S. Treasury bonds holdings
The IIF revealed that sovereign wealth funds in GCC countries, largely led by Saudi Arabia, have tended in recent years towards investing more in global stocks. They are investing in foreign direct investment and moving away from safe traditional assets.
Moreover, the GCC’s holdings of U.S. Treasury bonds reached a record level before COVID-19. Then, it declined sharply in the first few months of 2020, settling at a lower level.
Kuwait’s holdings of U.S. Treasury bonds remained stable. Meanwhile, they witnessed a gradual increase in the UAE due to reasons like increases in oil prices. This led to an increase in the current account surplus. However, it was largely offset by a steady decline in Saudi Arabia’s holdings of U.S. Treasury bonds.
Saudi Arabia and U.S. bonds
The report said that between February 2020 and September 2023, Saudi Arabia’s holdings of U.S. Treasury bonds decreased by about 40 percent.
The IIF stated that despite the coincidence of political tension between the United States and Saudi Arabia, as well as the rapprochement of relations between the Kingdom and both China and Russia, the institute believes that it is too early to talk about a Saudi move to divest American assets. The IIF states that it is important to take into account Saudi Arabia’s local environment.
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