The governor of the Central Bank says the country should 'insulate' itself as a defensive measure against global economic uncertainty.
UAE economy should 'insulate' itself - Suwaidi
ABU DHABI // The country should take steps to insulate itself from global economic uncertainty, the Governor of the Central Bank said Thursday. Sultan al Suwaidi told a banker's lunch at the Emirates Palace hotel that the country's financial system had felt the pain of the global crisis, even though its banks had not ventured into risky structured investment products and derivatives that helped spark the crisis in the West. "If we analyse things to find out why the UAE financial system was affected by the crisis, one major reason is that we have taken the global financial system for granted when we take part in any shortcomings," Mr al Suwaidi said. "But I am not going to worry about how to fix the global financial system. I would rather that we take initiatives to become a more insulated country to avoid the risks associated with total integration." Mr al Suwaidi stopped short of outlining proposals to insulate the UAE's financial system, but said the financial crisis would result in a general tendency "to develop local banking systems with 100 per cent reliance on local funding". He said that GDP would was likely to slow this year "from the high single digits to the low single digits", a forecast matching recent predictions by economists. Mr al Suwaidi reiterated that local bank balance sheets were healthy and lending activity was restarting, thanks in part to the Government's injections of capital in recent months. Last September, the Central Bank allowed banks to overdraw their accounts by Dh50 billion (US$13.61bn), although Mr al Suwaidi said banks had stopped using this facility. The Government also made Dh70bn in deposits available to banks last year, and Abu Dhabi this month spent Dh16bn recapitalising five of its banks. "Liquidity at banks is stable now and no bank in the UAE is overdrawing its current account beyond its reserve requirements," Mr al Suwaidi said. "Interbank interest rates have come down, but are still relatively higher than some other GCC countries." The three-month Emirates interbank offered rate - an average of interest rates that banks charge each other for loans - stands at about 3.43 per cent, down from 4.79 per cent last October. That rate compares with 1.14 per cent in Saudi Arabia and 2.75 per cent in Kuwait. As a further measure to lower interbank interest rates, Mr al Suwaidi said he was working with the Ministry of Finance to help tip the balance of bank deposits towards the retail segment. A strong retail deposit base is considered less risky for banks than large deposits held by corporations, as corporate withdrawals on a large scale could quickly use up loan reserves. "Generally speaking, retail deposits are considered more stable," said John Tofarides, an analyst at Moody's in Dubai. "If you have a high concentration in your funding base and you lose one of your deposits, you will probably face liquidity pressure." Mr al Suwaidi said the scheme to encourage stronger retail deposits would be put in place soon, but he did not provide any further details. "We believe the scheme that we intend to put into place soon for corporate-to-bank deposits will also influence the interbank rate and will eventually bring it down." firstname.lastname@example.org