Bank deposits declined for the first time in five months in April as signs suggest the euro-zone debt crisis may be taking a toll on the region's financial system.
Deposits dipped by 0.6 per cent from March to reach Dh1.14 trillion (US$310.36 billion), data released yesterday by the Central Bank shows.
M2 money supply, which gauges currency in circulation plus non-government deposits, dipped by 2.4 per cent to Dh880.4bn over the same period. M3, which tracks M2 plus government deposits, fell by 1.1 per cent to Dh1.06tn.
The figures mirror recent data showing a stagnation in deposits in Saudi Arabia and Kuwait.
"One factor that may be responsible for these more sluggish trends is the ongoing euro-zone difficulties, which are reducing investor appetite for cross-border risk," said Rahul Shah, a regional banking analyst at Deutsche Bank in Dubai.
"Around 12 per cent of deposits are from non-residents. If a portion of these were repatriated this could reduce the overall volume of deposits."
The volume of UAE government deposits rose sharply during March, and April's decline may also have been partly due to a return to a more normal level, said Mr Shah.
At the end of last year, a sixth of UAE banking assets were funded by foreign liabilities, a higher proportion than the regional average.
A significant amount of the debt is believed to be from European banks.
Indications have already emerged some euro-zone banks are scaling back their international activity to help to build a capital cushion in their domestic markets against the crisis.
Lending by euro-zone banks outside the borders of the single-currency bloc dropped 40 per cent between the first three months of this year compared with the same period of last year, data from the Bank for International Settlements shows.
But another analyst ruled out the euro-zone crisis as a reason behind the UAE's deposit decline.
The most likely explanation is a paying down of debt by the Government, or companies with government links, said Naveed Ahmed, a senior financial analyst at Global Investment House in Kuwait. "It could be that the Government or any other government-related entity or corporate withdrew them for some purpose, possibly for foreign-debt repayment," he said.
Despite a rocky global backdrop, government-linked firms have in recent months made progress in paying off bonds falling due. In the latest example, Emirates Airline repaid a $550 million sukuk due this week.
The Central Bank data shows loans and advances dropped by 0.2 per cent on a monthly basis to reach Dh1.07tn in April. Total bank assets increased by Dh700m to Dh1.7bn during the same period.
Over the first four months of the year, bank lending rose 0.1 per cent, lagging behind the 6.5 per cent growth in deposits.
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