x Abu Dhabi, UAEThursday 18 January 2018

Central Bank hopes solving Dubai World's debt restructuring may help trim Eibor

Regulator bholds talks with banks to try to lower Eibor as concerns about exposure to Dubai World's debt makes them loath to lend funds for longer than one month.

A resolution of Dubai World's debt restructuring proposals should help to bring down the UAE's interbank lending rate, according to the chief economist at the Central Bank, Dr Mohammed Bechri. The benchmark interest rate used by banks for lending to each other, the three-month Emirates interbank offered rate (Eibor), rose from 1.9 per cent at the end of last year to 2.3 per cent at the end of last month. The regulator has recently held talks with banks to try to lower Eibor and ease lending.

The uncertainty created in the banking system by Dubai World's debt announcement in November was likely to be a main reason behind Eibor's rise, Dr Bechri said. "If my explanation is right that the Dubai World standstill announcement was the main factor behind the increase in the last three months, then we expect Eibor to go back to where it was before then and maybe even further," he said.

Concerns about exposure to Dubai World's debt had led to a reluctance among banks to lend funds for longer than one month, analysts said. The Dubai Government-controlled conglomerate in March outlined proposals for restructuring US$24.8 billion (Dh91.09bn) of debt. The announcement eased fears of a default that had emerged since the company asked creditors for a debt standstill in November. The proposals could be accepted in a few weeks, said Simon Cooper, the chief executive of HSBC Middle East.

"We think the proposal is fair and a good way forward for the United Arab Emirates," he said. HSBC is one of more than 90 local and international lenders in negotiations with Dubai World. But Deepak Tolani, an analyst at Al Mal Capital, said a deal with the conglomerate would not immediately lead to a decrease in Eibor. "The liquidity situation has been tight and will still be tight after Dubai World is resolved," he said.

The Central Bank met in March with lenders for talks about how to stop the rise of Eibor. But bankers say efforts to lower Eibor have been misguided, because the rate does not reflect the real cost of borrowing money. @Email:tarnold@thenational.ae