MANAMA, 9 March 2008 — The UAE central bank announced that banks in the UAE would be allowed to borrow dollars against CDs in their currency for a maximum period of three months effective Monday.
However, the interest rates on these facilities have yet to be released, StanChart in its series of reports title “On the Ground” said.
Highlighting the marketing implications, the StanChart report said that even though the interest rates on these facilities are not yet known, this would regardless add dollar liquidity to the UAE market.
Over the past few weeks, it has become increasingly difficult for local players to raise capital in dollars even though the local economy barters and borrows in dollars.
The liquidity dirhams have been ample but the liquidity of dollars has not due to people’s reluctance at this time to buy dollars. The Central Bank’s decision will add much-needed USD liquidity, which will help ease funding constraints. However, this can also have an undesirable side effect.
The arguments for a revaluation are stronger than ever. There is, therefore, a genuine risk that this USD 3-month liquidity injection will be used to fund even more long AED positions. It is therefore likely to see even more revaluation pressure on the AED.