Liquidity levels stress credit availability in the UAE

Financial experts are reporting on a liquidity crunch in Dubai as the Emirates continue to manage a fast-growing national economy.

Data from an October monetary report cited in the Gulf News Journal on November 27 showed lower deposits and a higher volume of loan growth leading to tightened liquidity that could affect borrowing.

“Banking sector liquidity has continued to tighten in 2016, with stronger credit growth of 6 percent year to date than deposit growth (of) 2.1 percent,” Monica Malik, chief economist of Abu Dhabi Commercial Bank, said in a press statement. “This ongoing tightening in liquidity continues to be reflected in Emirates Interbank Offered Rates (EIBOR) rising further."

Assessing the decrease in deposits, analysts cited government sector revenues down 8.9 billion Dirhams.

Although government deposits were down 25.3 billion Dirhams from June, they were still up 2 percent year-over-year.

Officials also cite “soft credit growth,” but strong demand from borrowers. Experts say lower oil prices have driven greater demand in the mining sector, while contractors need money for construction projects.

Nitisha Pagaria, senior analyst of Investment Research and Analytics at Aranca, also sees the changes in liquidity pushing further increases in EIBOR interest rates. 

“Lower deposits and higher credit offtake by government and related entities has caused tightening liquidity conditions in UAE money market this time of the year.” Pagaria told the Gulf News Journal. “Liquidity tightening in the UAE banking sector could cause a further increase in Emirates Interbank Offered Rate, resulting in rising funding costs and declining bank margins.”

Pagaria said various financial enterprises in the region may not feel the results in the same ways.

“Smaller private banks, which have relatively higher funding costs, could be hit harder than their larger peers,” Pagaria said. “However, seen from a longer term financial stability perspective, the UAE banking sector has adequate capital cushion, indicated by a capital adequacy ratio of 18.6 percent  in September 2016, and appears well positioned to handle market uncertainties.”

Also, she said, the national banking system has gotten good marks from ratings agencies.

“Moody’s, a leading rating agency, maintained a stable outlook for the UAE banking system in October 2016 based on their strong capital base and continued government support for this sector.” Pagaria said.