RIYADH, Jan 12: Saudi Arabia's largest state bank urged the government to reduce the kingdom's exposure to the dollar by investing more assets outside the United States and gradually changing the riyal’s peg to the weak US currency.

National Commercial Bank, Saudi Arabia's biggest by assets, said the world's largest oil exporter should set up a sovereign wealth fund to invest surplus revenues, now partly managed by the central bank, which has $285 billion in foreign assets.

The bank's statement, prepared by its chief economist, is the latest sign of pressure on the government to review exchange rate policy for the first time since 1986. The central bank and officials have repeatedly ruled out any policy shift.

“Time has come to reconsider the continued pegging of the Saudi riyal to US dollar, provided that this is done gradually, taking into account the unfavourable impact on official reserves, which are mostly denominated in dollars,” said Said al-Shaikh, National Commercial's chief economist.

The government should set up a sovereign fund to “increase the returns on investment of most government surpluses, which are currently invested in US Treasury bonds”, Shaikh said.

The kingdom should “diversify government investments across asset types, countries and different currencies...to reduce risks and increase profitability,” he said.—Reuters