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Sun 9 Aug 2009 11:21 AM

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Cautious UAE banks may hamper govt stimulus spending

UAE's weak monetary growth may indicate spending is failing to boost economy - NBK.

Weak monetary growth in the UAE may be an indication that higher government spending is not having the desired effect on the country’s economy, National Bank of Kuwait (NBK) has said.Despite the federal and Dubai governments boosting their annual budgets this year by 21 percent and 11 percent, respectively, annual growth in the broad M2 measure of money supply fell to 6 percent in June, the lowest since recent records began.

“Although helped by a combination of emergency policy measures, rising equity prices and improved confidence of late – the monetary system remains in a fairly fragile state, with few signs that banks are set to resume lending in a way that would help generate a decent rebound in economic growth,” said NBK senior economist Daniel Kaye.

One reason for the amount of money in circulation not rising more could be that the increase in government spending hasn’t yet fully worked its way through the system, he added.

Another factor could be that much of the extra money has leaked out of the country via imports and capital repatriation, or the transfer of foreign companies’ money back to their home countries.

“The most important factor could be that money is not circulating through the system properly, with hesitant banks looking to hoard money and preserve capital rather than extend or renew credit to customers,” said Kaye.

UAE banks have struggled to lower their loan to deposit ratios to the 100 percent mandated by the central bank after investors betting on a revaluation of the dirham against the dollar exited the country last year.

Aggregate bank deposits fell by 1.1 percent in June, dashing hopes of banks relaxing their lending criteria.

“Until there are more concrete signs of improvement in the data, the authorities will want to ensure that policy remains extremely supportive of prospects for economic recovery,” Kaye said.

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