DUBAI: United Arab Emirates interbank lending rates rose yesterday as markets awaited details of a 50 billion-dirham ($13.6 billion) emergency funding facility designed to help banks cope with the global liquidity crunch.
Market rates are expected to ease once banks begin to draw funds from the facility, whose creation was announced on Monday by the central bank.
Even so, global financial turmoil could brake credit growth in the world’s fifth-largest oil exporter, where a real estate boom has been fed by a more than five-fold rise in oil prices in six years. Credit growth was 49 percent in the year to June.
“It’s a very tough balancing act that the central bank needs to achieve,” said Marios Maratheftis, regional head of research at Standard Chartered Bank.
“You don’t want to have credit growth at these levels, but the challenge is to achieve a deceleration in a gradual manner.”
The one-month Emirates Interbank Offered Rate rose as much as 16.25 basis points to 3.6875 percent, from 3.525 percent on Monday, before easing to 3.64375 percent. The rate is up more than 160 basis points since early June.
Three-month interbank rates rose to 3.7 percent from 3.61 percent on Monday and are up about 170 basis points since June. “The money markets in the UAE are quite tight right now,” said Sanjay Uppal, chief financial officer of Emirates NBD, the largest Gulf Arab bank by assets.
“I think the central bank line is going to offset the pressure of tightening on liquidity internally. At this point it looks sufficient,” Uppal said.
Slower credit growth
The UAE central bank’s plan to make funds available to banks to address bottlenecks in money markets has prompted calls for other Gulf states to intervene to improve liquidity conditions.
Kuwait’s central bank said on Monday it “will not hesitate” to provide liquidity to the banking system if necessary.
While states in the world’s biggest oil-exporting region are in a good position to weather the worst US financial crisis since the Great Depression, global financial turmoil will raise funding costs and hit loan demand, bankers and analysts said.
Net profit growth in the double digits has been a regular feature for Gulf banks; Emirates NBD’s second-quarter profit jumped 45 percent on corporate and retail lending.
“We have seen in the last two to three years money supply growth at fantastic levels. Now we are entering a time when that situation has changed,” Uppal said.
“Credit growth in the UAE will still be healthy, in the double digits, but will not continue at 40-percent levels. Institutions would be really evaluating their funding requirements quite closely at this point.”
Liquidity in the UAE banking system has fallen off since the Gulf state said in April it would keep its dirham pegged to the dollar at the same rate, a pledge that quashed months of market bets it could revalue its currency to fight inflation.
The influx of speculative money had driven UAE interbank rates below global rates, making it attractive for companies and individuals to borrow money in dirhams and stoking consumer prices already at a 20-year high of 11.1 percent last year.
As speculative money rushed out of Gulf currencies into the summer, UAE rates climbed above global rates, while credit spreads have widened, reducing the appeal of loans, Uppal said.
Still, UAE interest rates, which have tracked seven US rate cuts in the last year, remain sharply negative. Credit growth should continue even if banks become more careful about their lending, said Monica Malik, an EFG-Hermes economist.
