7th APRIL 2015 - Vol.XXXVIII No.018
Business News

UAE bank sets up $13.6bn facility

MANAMA: The UAE has become the first regional country to show signs that it may be facing a liquidity problem in its financial system. The UAE Central Bank has made a 50 billion UAE dirham ($13.6bn) facility available to banks operating in the country.

The bank has also announced that it has reviewed additional resources to provide support as needed. Details of the facility have yet to be released.

Total loans and advances in the UAE were 894bn dirhams in June this year, so the facility is about 5.6 per cent of the domestic credit market, according to Standard Chartered Bank regional head of research Marios Maratheftis.

"The central bank signalled its concerns over liquidity when it announced on September 15 that it was looking at interbank liquidity very closely," he said.

"Over the past few weeks, interbank liquidity was tightening, on the back of foreigners reducing their bets for an dirham revaluation and a deteriorating global environment. According to the central bank, 90pc of the inflows related to the currency play have already fled the country.

"As a result of the liquidity squeeze, Emirates Interbank Offer Rates (Eibor) jumped by approximately 170 basis points to 3.61pc from early June to date. Despite the jump, rates remain relatively low.

"It is, however, worth noting that Eibor rates may not be accurately reflecting true liquidity conditions as inefficiencies in the interbank market can distort rates.

"The UAE authorities have the financial strength to add liquidity when needed, and this move suggests that the central bank is seeing the need to provide the market with added liquidity now," he said. "Even with liquidity drying up and interbank rates rising, in real terms, interest rates are still significantly negative."

The latest figures from the central bank showed domestic credit in the UAE growing by 49pc year-on-year as of June.

"With inflation running in double digits, there is a need for the central bank to contain credit growth," he said.

The problem is that so far the ultra loose monetary conditions led to aggressive credit growth. If left entirely up to the markets, the correction in credit growth can be very sharp, as we saw in the case of the US economy.

"The intervention of the central bank through the provision of the credit facility needs to ensure that any fall in credit growth happens in an orderly way," he added."The authorities need to adopt a goldilocks approach - not too hot, not too cold but just right.

"In other words, the authorities will have to ensure that there is enough liquidity in the system to keep the economy going, but, at the same time, bring down credit growth from 49pc to more sustainable levels. This will be a tough balancing act," he added.

On Sunday, the Central Bank of Bahrain announced that after conducting a comprehensive survey of the banking sector it had concluded that local banks were insulated enough to withstand any fall out from tremors in global financial markets.

"Bahrain-based banks have managed to withstand the negative global trends and are enjoying sufficient liquidity to meet commitments and ensure the usual workflow," the CBB said.

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