Money on the move

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State intervention has helped to recapitalise Gulf banks’ balance sheets, while their reluctance to lend has created healthier loan-to-deposit ratios.

Though the days of easy credit in the Gulf are a distant memory, there is evidence that liquidity is improving in the region, as Gulf economies emerge from the shadow of the cashflow crunch. Alex Delmar-Morgan reports.

Since last autumn, bank lending has ground to a near halt and starved companies of much needed credit to repay loans and meet their short term obligations. Nevertheless, there are distinct signs that the money supply is increasing across the Gulf, a welcome development for both borrowers and lenders.

“We believe there has been an easing of the liquidity environment over the last couple of months,” says Raj Madha, a Dubai-based analyst with Egyptian investment bank EFG-Hermes. “EIBOR is declining and this is reflective of less tension in the monetary system.”

Three month EIBOR — or Emirates Interbank Offered Rate, the interest on interbank loans in the UAE — is a measure of liquidity. It has fallen over two percent to 2.46 percent from a peak of 4.78 percent last November, and nearly one percent since the start of April, according to Standard Chartered’s recent report.

In addition, the bank stressed that liquidity was returning across the whole region with Bahrain’s three month BHIBOR dropping 52 basis points to 1.67 percent as of June 7, and Saudi Arabia’s three month SAIBOR easing a third of a percent in the same period.

Dr Nasser Al Saidi, chief economist at Dubai International Financial Centre (DIFC), argues that liquidity has improved and must now gradually filter into the non-banking system.

“You need to distinguish between the first phase which is restoring liquidity to the bank system which I believe has been done,” he says. “Now you need liquidity and credit to be restored into the rest of the economy — into non-bank corporates, into sufficient levels of trade finance and into longer term lending.”

A return of liquidity to the system and an easing of banks’ loan criteria, is matched by a rosier outlook for the Gulf’s economies as oil prices rise, bourses rally and the housing market shows some signs of stabilisation.

From a low of around $32 in December crude oil prices have recovered to around $70 a barrel; the Dubai Financial Market (DFM) has gained 34 percent since the start of the year, according to calculations by Standard Chartered; and HSBC said at the end of last month that Dubai house prices rose four percent and five percent in April and May respectively.

Meanwhile, government intervention across the region has helped to recapitalise banks’ balance sheets. Last month the Qatari government offered to buy around $4.1bn of real estate investments from Qatar’s banks as it moves to limit the fallout of the financial sector from the global crisis. The UAE central bank injected AED70bn ($19bn) into its financial system last October. And the reluctance of banks, particularly in the UAE, to lend in recent months has left them with healthier loan-to-deposit ratios.

However, analysts across the Gulf say that while companies may have the money to lend, many still are choosing not to. Simon Williams, a Dubai-based economist at HSBC, says the slowdown of the credit growth is a global trend and not confined to the Gulf.

“Banks are assessing the quality of their existing assets, looking at their own funding base, and still making more cautious decisions than they made this time last year. This is part of a credit cycle not just in the Gulf but everywhere in the world,” he says.

Raghu Mandagolathur, head of research at Kuwaiti investment bank Markaz, says this trend of banks holding cash is being played out across the Gulf.

“We are seeing growth of deposits in the banking system but the flow of liquidity back into the economy is still not happening,” he says. “Banks are still holding cash and parking it with the central banks because they are not feeling confident. This is creating pressure on the system with liquidity flowing in and not able to get out.

“Companies in Kuwait are taking an extraordinarily long time to declare their results,” he continues. “You don’t have closed books and audited statements so it is very difficult for [lenders] to assess the creditworthiness of borrowers. Companies are taking a long time to finalise their books and this is creating a lot of confusion in the marketplace. Banks are worried about presenting their asset quality and lending again.”

Mandagolathur says a similar situation is occurring in Saudi Arabia. Despite the Saudi Arabian Monetary Agency (SAMA) last week lowering its repo rate to 0.25 percent to stimulate lending, many regional banks are happy to leave funds in the Saudi central bank because they judge the private sector too risky.

Williams at HSBC agrees. “Banks have funds and they are building up assets that they judge to be lower risk than lending to the private sector. I expect that trend to be in play in other parts of the region.”

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