US dollars are becoming more difficult and expensive to obtain in Gulf money markets since Standard & Poor's sharply downgraded the sovereign credit ratings of three of the region's oil exporters last week, bankers say.
The tightening of dollar liquidity, despite most countries' currency pegs to the dollar, which normally facilitate dollar supply by reducing exchange rate risk, shows persistent worries over the region's ability to cope with an era of low oil prices.
Some foreign banks that supply dollars to the Gulf have cut back their credit lines to reduce risk. The result could be higher costs for banks and companies doing international business in the region.
"Liquidity in the local currency is not a problem at all. It is growing. In customer deposits, it's ample in Bahraini dinars," Abdulkarim Bucheery, chief executive of Bahraini bank BBK, said this week.
"Liquidity in foreign currency, in USD, is shrinking. And especially with the downgrade of the country, some internationals may find it timely to cut lines. If that happens, I'm sure liquidity will be under question."
The dollar squeeze in the Gulf is not so far as serious as it was for a few months during the global financial crisis in 2008, but it is significant, especially for smaller banks in the region, bankers said.
US dollar supplies appear most seriously affected in Bahrain and Oman, affected to some degree in Saudi Arabia, and almost normal in the UAE, which with its diversified economy and huge foreign assets is widely believed to be able to handle cheap oil more comfortably than its neighbours.
In early January, it cost 0.3857 Omani rials to buy a dollar for delivery in 12 months' time; that price is now 0.4000, said a Gulf banker involved in quoting rates. The rate for Bahraini dinars has risen to 0.3830 now from 0.3807 in January. Banks can face different rates depending on their size and the scope of deals.
Until the last few months, worries about tightening liquidity in the six Gulf Cooperation Council nations focused on local currency money markets, as low oil prices slashed governments' revenues and reduced new deposits of state funds in banks. This pushed up short-term interbank lending rates.
Additional factors are now constraining access to dollars. One factor is the enforcement of US regulations designed to crack down on tax avoidance and anti-money laundering rules.
These have imposed extra costs on US banks, prompting many to reduce the number of foreign institutions with which they do business, and making international banks operating in the United States more wary of ties with the Gulf.
Since December, the central bank governors of the United Arab Emirates and Bahrain have publicly complained that it has become harder for some local banks to conduct US dollar transactions.
Another blow came when Saudi Arabia and Kuwait acted to stifle speculation against their currencies in forwards markets, bankers said. In January, the Saudi central bank urged banks not to conduct derivatives trades that would pressure the riyal, and this month, Kuwait's central bank managed movements in its daily dinar fixing to deter speculators.
As speculation diminished, trading activity in the region's foreign exchange market shrank and foreign banks became less active in supplying dollars, bankers said.
A third blow came last week when S&P cut Saudi Arabia's long-term sovereign credit rating by two notches to A-minus, while downgrading Bahrain to junk status and Oman to one notch above junk. In all three cases, it cited large state budget deficits caused by cheap oil.
The scale of the downgrades was a surprise and prompted some foreign banks to review their exposure to the Gulf, several international bankers said, declining to be named because of commercial sensitivities.
"Some international banks have cut interbank lines to assess the solvency position of domestic banks, to see if they can meet their dollar obligations," said one.
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