Saudi Arabia, UAE pour $10bn into banking system

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DIRHAM DECISION: UAE has injected 25 billion dirhams into the banking system. (Getty Images)

Saudi Arabia and the United Arab Emirates poured up to $10 billion into their banking systems to boost liquidity as Gulf Arab policymakers prepared on Tuesday to discuss a joint response to the global crisis.

The Saudi central bank made deposits worth up to $3 billion with banks struggling to cope with the turmoil while the UAE Ministry of Finance funnelled 25 billion dirhams ($6.8 billion) into the system as part of a 70-billion-dirham rescue facility.

States across the world's biggest oil-exporting region are trying to cope with the worst global financial crisis since the Great Depression, which threatens to put the brakes on a regional economic boom.

"The main challenge for Gulf states is to shore up confidence in the banking system and get the credit cycle going again," said Mushtaq Khan, regional economist at Citigroup Global Markets.

"They can't have diverging money-market conditions. Each country is most likely going to make decisions based on demands of their separate markets."

In the past month, Gulf central banks and governments formulated separate responses to the crisis, including guaranteeing bank deposits, easing lending restrictions, setting up emergency funds and pouring money into ailing stock markets.

The Saudi Arabian Monetary Agency (SAMA) took the latest step to defrost interbank lending by pouring in between $2 billion and $3 billion in the form of riyal and dollar deposits with banks on Monday, bankers said on Tuesday.

The UAE finance ministry said it had transferred 25 billion dirhams into banks based on the size of their loan portfolios.

"The Ministry has placed the first portion of the payment to support liquidity at banks," the ministry said. "This portion... is designed to support the capital of national banks."

Interbank rates eased on Tuesday after the moves, with the three-month Saudi Interbank Offered Rate falling to 4.6375 percent from 4.65125 percent.

Saudi Arabia, the UAE and four other members of the Gulf Cooperation Council (GCC), which is preparing for monetary union, will meet on Oct. 25 to discuss how they can better coordinate policy responses, Gulf sources said on Tuesday.

The global turmoil has hit the Gulf region after six years of high oil prices allowed state and private investors to funnel billions of dollars into industry and infrastructure projects.

Banks are now struggling to finance these projects, leading economists and policymakers to expect project delays and cancellations.

"It is normal that we be affected by what is happening in global markets," UAE Minister of Economy Sultan bin Saeed Al-Mansouri said.

"But there are elements of confidence and protection that are relevant to the particulars of our economy and its diverse base of income," he said in remarks reported by the daily Emarat al-Youm.

This week's meeting of finance ministers and central bank governors in Riyadh follows a call from Saudi Arabia's highest economic body for Gulf states to look at how they can coordinate their policies as Western economies head for a likely recession.

It will also happen the day after producer group OPEC holds its own emergency summit on oil prices, which have tumbled since hitting record highs above $147 a barrel.

"Most Gulf central banks have already started moving in some way or the other. If they sit and discuss it they can come out with formulated ideas," said EFG-Hermes economist Monica Malik.

Despite lower oil prices, Gulf states are poised to continue boosting their budgets to keep their economic diversification plans on track, economists said. The UAE said on Tuesday it was raising state expenditure by 21 percent next year.

Kuwait's leader, Sheikh Sabah Al-Ahmad Al-Sabah, also urged parliament and the government to push through reforms to help move the economy away from a reliance on oil exports.

Disputes between parliament and government have often paralysed legislative powers in Kuwait, the only Gulf oil producer that does not peg its currency to the dollar.

Kuwait's central bank - which cut its benchmark interest rate this month - said last week it had shifted its priority away from fighting inflation to boosting confidence in its banking sector.

"The priority for all Gulf states is going to be to look out for their domestic economies," Khan said. (Reuters)

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