x Abu Dhabi, UAETuesday 25 July 2017

Gulf banks likely to follow UAE's emergency fund lead

Gulf governments are likely to follow the UAE central bank's lead to provide emergency lending.

Regional banks are under pressure to meet the challenge laid down by the UAE's monetary authority.
Regional banks are under pressure to meet the challenge laid down by the UAE's monetary authority.

Gulf governments are under pressure to provide liquidity to their banking sectors after a decision by the central bank to provide Dh50 billion (US$13.6bn) of emergency lending. The UAE was reacting to a regional cash shortage that has spread from the Wall Street meltdown and threatens to slow growth and cut off financing for property and infrastructure projects. "I think other countries will follow suit. They won't leave the entire Gulf banking system strapped for cash," said Hany Genena, a senior economist at the Gulf Finance House. If the UAE's unilateral move stays unmatched, it could create an imbalance in the GCC, some analysts said. Cash-starved banks from other countries may descend on the Emirates looking for funds at government-subsidised prices. "If you want to talk about creating a monetary union in the future, you can't have one country providing liquidity to the rest of the region," said Mushtaq Khan, a regional economist at Citigroup. The Central Bank of Kuwait is already preparing to take similar emergency measures in response to pleas from banks, according to a statement released to the Kuwaiti newspaper al-Qabas. The bank said: "The board affirmed that it will not hesitate to undertake the appropriate measures in this regard, including the readiness of the central bank to provide any local banking institutions with the necessary liquidity if there is a need for that." A senior bank executive in Kuwait said: "I think the GCC central banks should come together to relieve the liquidity shortage. We hope this is the first of several moves." The Kuwait Investment Authority (KIA), the state's sovereign wealth fund, had already pumped more than 100 million Kuwaiti dinars (Dh1.38bn) into the local stock market, Bader al Saad, the KIA managing director, said in an interview on Al Arabiya Television yesterday. Bahrain, by contrast, is not planning any emergency lending at the moment. "We do not see any need for an injection," said Khalid Hamad, the executive director of banking supervision at the Central Bank of Bahrain. "The banks in Bahrain are in good shape." Last week, foreign banks stopped lending amid growing global uncertainty. Gulf interbank lending rates shot up as the demand for cash outstripped supply. In the UAE, 90 per cent of the speculative "hot money" also left the country, after foreign investors agreed that the dirham would not be de-pegged from the dollar in the near future. Interbank lending rates, or the price that banks charge each other for loans, in Kuwait and Saudi Arabia have been significantly higher than they are in the UAE. On Monday, the one-month Kuwait interbank offer rate stood at 4.81 per cent, while the equivalent rate in Saudi Arabia was four per cent. In the UAE, a one-month interbank loan went for only 3.48 per cent on Monday. Although analysts expect the UAE central bank's new lending facility to lower the interbank lending rate in the Emirates once it is implemented, the rates have continued to rise following the announcement. Exact details about how the facility will function, including what types of assets it will accept in exchange for cash, have not yet been made clear. Analysts said the move in the UAE could further increase inflationary pressures in a region that is already suffering from record price growth. "The lending facility is likely to keep credit growth strong," said Monica Malik, the director of economic research at EFG-Hermes. "When credit growth is high, it adds to inflationary pressures." Andrew Gilmore, an economist at the Samba Financial Group, said he expected annual inflation this year in the UAE to accelerate to about 13 per cent, up from 11.1 per cent last year. tpantin@thenational.ae