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Wed 18 Jun 2008 03:07 PM

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Inflation threatens Gulf Arab banks

Citi analysts says lenders face host of dangers from record inflation that risks stunting growth.

Gulf Arab banks face a host of dangers from rising inflation as surging prices may dampen growth, reverse a credit cycle upswing or force a regulatory response, analysts at Citigroup said in a research note.

Nevertheless, many banks listed in the booming oil economies in the region were well-positioned to profit from a rise in energy income in the short term, Citi said in the note.

"The combination of surplus liquidity and strong investment demand amidst a negative real interest rate environment bodes well for the GCC banks in the short term," the analysts said.

But inflation, which has hit record highs in several Gulf economies, may spoil the party.

Central banks in the region have pegged their currencies to the US dollar, leaving them with few effective tools to fight inflation. As a result, they may raise bank minimum reserve requirements, tighten liquidity requirements, regulate interest rates, or introduce limits on credit growth, Citi said.

"The substantial over-heating of regional economies could prompt regulators to adopt other measures to potentially dampen credit growth," the bank said.

Oman has already said it will raise the minimum reserve requirements for its banks to 8 percent from 5 percent in August - perhaps setting the tone for other central banks in the region.

Citi said it was generally positive about the growth prospects for the banks and especially favoured those with international exposure.

Those include Bank Muscat, National Bank of Abu Dhabi (NBAD), National Bank of Kuwait (NBK) and Qatar National Bank (QNB). (Reuters)

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