Treasury chief Geithner in Gulf to explain US economic defense

Analysis Timothy Geithner is scheduled to visit to the Gulf this week with the message that the US and its dollar remain sound destinations for the region's oil profits.

ABU DHABI // Timothy Geithner is scheduled to pay his first visit to the Gulf as US Treasury secretary this week with a message that may sound jarringly familiar to the one his predecessor delivered a little over a year ago: the US and its dollar remain sound destinations for the region's oil profits. Mr Geithner's visit is part of a zigzag journey across Europe and the Middle East to explain the American response to the global economic recession and win support for greater financial pressure on Iran and international terrorist networks.

Analysts say Mr Geithner may also urge Saudi Arabia and the UAE to lend more money to the IMF to help bail out nations ravaged by the global economic crisis. Mr Geithner is due to arrive in Jeddah today from London and comes to Abu Dhabi late tomorrow. While Gulf governments' investments in US assets pale in comparison to those from big Asian exporters such as Japan and China, the Gulf is the largest foreign investor in US stocks, thanks to share purchases by big sovereign wealth funds such as the Abu Dhabi Investment Authority (ADIA).

According to an official at the US Embassy, Mr Geithner is scheduled to hold a meeting today with the Jeddah Chamber of Commerce and Industry, followed by official meetings including one with King Abdullah. In Abu Dhabi, Mr Geithner will take part in a breakfast meeting with the US-UAE Chamber of Commerce co-hosted by Sheikha Lubna Al Qasimi, the Minister of Foreign Trade, before a meeting with the Central Bank Governor Sultan al Suwaidi and officials from the ADIA. Mr Geithner may also meet Sheikh Mohammed bin Zayed, Crown Prince of Abu Dhabi and Deputy Supreme Commander of the UAE Armed Forces.

Mr Geithner's visit is part of what appears to be an evolving busking ritual for US Treasury secretaries. In June last year, the Bush administration's Treasury secretary, Henry Paulson, came to the Gulf to dispel concerns about increasing xenophobic reactions to Arab investment, and to extol the virtues of buying US dollar-denominated investments. Since then, the global financial crisis has seen US stocks lose nearly 40 per cent of their value, torpedoing the value of Gulf holdings in US companies and financial institutions, such as the ADIA's investment in Citigroup.

Rachel Ziemba, an economist at the consultancy RGE Monitor in New York, estimates that Gulf sovereign wealth funds saw the value of their holdings fall by roughly US$100 billion (Dh367bn), to $1.1 trillion, between the end of last year and last month. She estimates that the ADIA, which does not publicise its holdings, has seen its own assets decline from roughly $490bn at the end of 2007 to about $300bn.

Mr Paulson's warning last year not to bet against the dollar has also proved a mixed call: the dollar has risen against the euro and Swiss franc, but it has fallen against the Gulf's biggest trading partners, China and Japan, making imports from those countries more expensive even as demand for Gulf oil dwindles with Asia's economic slowdown. Most Gulf currencies, including the dirham, are pegged to the dollar and so move with it against other countries' currencies.

Mr Geithner may therefore have an even tougher time winning over Gulf governments than Mr Paulson did, some economists say: with oil prices roughly half where they were when Mr Paulson came over, and economic growth dipping to what many economists forecast may be zero, Gulf governments are using a greater portion of their oil earnings to pay for projects at home and handing less of it to sovereign funds for investment overseas.

"The GCC's role in global asset markets may be more subdued, even as their role in domestic asset markets and economies grows," Ms Ziemba wrote last week on RGE Monitor's website. The US also finds itself battling a groundswell of concern about its expanding financial deficit. To fight the recession, the US government is trying to stimulate growth by spending more and more money it does not have, borrowing an estimated $2.3tn since the start of last year.

Washington is able to borrow a lot of that money, economists say, from US citizens, who have started saving their money amid rising unemployment and economic uncertainty. But many of the borrowed dollars are coming from the US Federal Reserve, which, by buying US government bonds, essentially prints new dollars. This burgeoning supply of greenbacks, combined with rising US indebtedness, is raising concerns about the creditworthiness of the US government, which has traditionally been considered risk-free.

Much of Washington's funding will need to come from the same foreign lenders that helped fund massive US deficits for years: the Gulf and Asia, where governments and other investors are worried about the health of their dollar holdings. At the Group of Eight (G8) leading industrial nations' annual summit last week in Italy, China and other developing nations took advantage of the meeting to challenge the dollar's status as the dominant global currency for trade. One Chinese official reportedly called for a "diversified and rational international reserve currency regime".

As they export, China and other governments with trade surpluses accumulate vast amounts of US dollars, which they in turn invest in dollar-denominated securities in order to prevent their own currencies from appreciating as their trade surpluses swell. The fear is that a rising supply of dollars and growing US indebtedness could put those holdings on shaky ground. Mr Geithner travelled to China last month to reassure the Chinese, pledging to reduce the US deficit. "The United States is committed to a strong and stable international financial system," he was quoted as saying in a speech in Beijing. "The Obama administration fully recognises that the United States has a special responsibility to play in this regard, and we fully appreciate that exercising this special responsibility begins at home."

Even if Mr Geithner manages to convince the Gulf and Asia that the dollar is sound, those governments are accumulating fewer dollars to lend. In Asia, falling exports mean governments are also pulling in fewer dollar reserves to invest in the US. Domestic stimulus packages, moreover, require that governments spend more money at home instead of investing it abroad. Likewise, Gulf governments are diverting more of their shrinking oil revenues to fund expansionary budgets and to provide financial support at home.

But some economists say that, with oil still near its five-year average, Gulf nations will still generate sizeable surpluses for the US to tap. While the dollar may appear ripe for depreciation, the US economy and its markets represent one of the few destinations large and liquid enough to support investment on the scale needed by big dollar-earning governments such as China, Saudi Arabia and the UAE.