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Mon 10 Oct 2011 05:47 PM

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Oman orders banks to avoid 'toxic European debt'

Central bank's executive president says it will continue to invest in US Treasuries

Oman orders banks to avoid 'toxic European debt'
Omans central bank has instructed local banks not to expose themselves to "toxic European debt"

Oman's central bank will keep investing in US Treasuries and it has also instructed local banks not to expose themselves to "toxic European debt", executive president Hamood Sangour al-Zadjali said on Monday.

Gulf Arab states like Oman, which mostly peg their currencies to the US dollar, are major holders of US assets, with oil - priced in dollars - their main source of revenue.

A downgrade of the United States' credit rating by Standard & Poor's in August prompted China, the top foreign holder of US government debt, to call for a new stable reserve currency.

"We are still keeping our investment in US Treasuries because no one else is pulling out their investments," Zadjali said on the sidelines of a financial forum.

He said there would be no change in the central bank's reserve policy and it would maintain its small gold holding.

Its foreign assets including gold, stood at OR4.9bn ($12.8bn) in August, 3.5 percent down from a year ago, data showed on Monday.

Zadjali's comments back up those of a senior Omani government official, who told Reuters in the immediate aftermath of the US rating cut that the sultanate would stick with US government paper.

Central banks around the world have held US Treasuries for their liquidity and safe-haven status.

Indebted European banks have been turning to the oil wealthy Gulf region for funding as they struggle to cope with the euro zone debt crisis but Zadjali said the regulator had urged local banks to be cautious.

"We have instructed local banks not to expose themselves to toxic European debts. That is why they are not affected by the European credit crisis," he said.

A Qatari investment group with links to the state's royal family will take over KBC's private banking unit and BIL, a part of Dexia, Luxembourg's Finance Minister Luc Frieden said on Monday.

The economy of the small non-OPEC oil producer, which saw social unrest earlier this year, is likely to grow by 5 percent in 2011, Zadjali also said, with inflation seen at 4 percent.

Earlier on Monday, Oman's finance minister, Darwish al-Balushi, said at the same forum that he expected growth for this year to be 5.5 percent, with the forecast for 2012 at 5 percent.

Analysts polled by Reuters in September forecast 4.0 percent growth in 2011 and 4.2 percent next year after an estimated 4.1 percent in 2010.

Inflation hit a 29-month high of 5.3 percent on an annual basis in August driven by food prices and an unexpected jump in personal care items, finance ministry data showed on Monday. The poll forecast average inflation of 3.9 percent for 2011.

Meanwhile, Qatar had shown interest in setting up an Islamic bank in the Gulf Arab sultanate, Zadjali said. However, the plans had not been finalised, he said.

The country's first Sharia-compliant banks - Bank Nizwa and Al Izz International Bank - would begin operating early next year and float 40 percent of their capital each, Zadjali also said.

Ali Hamdan al-Raisi, vice president of Oman's central bank, told Reuters in August that Al Izz International Bank had been granted a licence to become an Islamic bank, having initially been approved to operate as a conventional institution in September 2010.

The central bank granted the first license to Bank Nizwa in May. The minimum capital requirement for a newly incorporated bank is OR100m ($259.74m), Raisi said at the time.

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