A sharp slowdown of bank deposit growth in the United Arab
Emirates suggests inflows of money into the country are slowing or even
reversing, as low interest rates deter depositors and the impact of the Arab
Annual growth of deposits at UAE banks, which remained below
7.5 percent throughout last year, hit double-digit rates in February this year
and a peak of 16.0 percent in April. Growth stayed extremely strong through July,
when it was 11.5 percent.
Bankers and analysts said two main factors seemed to be
behind the growth. One was capital flight into the UAE, which has remained
politically stable this year, from countries in the Gulf and North Africa which
experienced political turmoil; growth in non-residents' deposits, which account
for roughly a tenth of total deposits, hit 40 percent in February.
The other main factor was relative interest rates, which
persuaded companies and individuals, from the UAE and other countries, to put
money into UAE bank deposits. The indicative three-month UAE interbank lending
rate was above 2.0 percent in the first quarter of this year, far above
near-zero interest rates for the US dollar, to which the UAE's dirham is
pegged; as the global and US economic outlook worsened earlier this year, it
became increasingly clear that US rates were likely to stay ultra-low for
But UAE deposit growth began slowing considerably in August,
when it fell back to 7.3 percent, and it hit a ten-month low of 5.3 percent in
September, according to the latest data from the central bank. On a
month-on-month basis, deposits have actually declined slightly every month
Analysts said both major factors behind deposit growth had
weakened. Fresh fund inflows due to the Arab Spring have decreased and may even
have reversed on a net basis, possibly because the initial, heavy wave of
capital flight has run its course, and perhaps because of a partial return of
stability to countries affected by the turmoil.
"We've had inflows of hot money because of unrest in
the region - basically people just took their money back. It is probably going
to be volatile for a couple of months, probably a bit longer," said a
banking analyst at a major UAE bank, who declined to be named because of the
sensitivity of the issue.
At the same time, investors seem to be abandoning the UAE
interest rate trade. In response to the build-up of deposits at banks, the
indicative three-month UAE interbank lending rate slid as low as 1.47 percent
in August, making UAE deposits much less attractive.
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"When we look at what banks in the UAE were paying for
deposits at the beginning of the year and what they are paying now, those rates
have come down. The spread between Eibor and Libor rates has narrowed over the
summer, making UAE deposits less rewarding," said Khatija Haque, senior economist
at Emirates NBD bank.
Outstanding certificates of deposit dropped from 119.2
billion dirhams ($32.5 billion) in May to 86.7 billion dirhams at the end of
September, according to central bank data. Giyas Gokkent, chief economist at
National Bank of Abu Dhabi, said this was a strong sign that short-term money
was exiting the UAE interest rate trade.
Some of this money left the country, but trading in the
foreign exchange market does not suggest extremely heavy fund outflows from the
UAE. Six-month onshore dollar/dirham forwards , which fall as pressure for
dirham appreciation against its peg increases, dropped from around plus 20
points at the start of this year to as low as around minus 20 in August, but
have now rebounded only partially, to around minus 5.
A treasury source at a UAE bank said a lot of money taken
out of deposits over the past three months did not leave the country, but was
shifted to other instruments with higher returns, such as structured products.
Slower deposit growth is putting modest upward pressure on
interbank money market rates; the three-month rate has edged up since August to
But the conditions for a sharp rebound of rates are not in
place. Annual growth in loans and advances by banks in the UAE, net of
provisions, rose to 3.5 percent in September from 2.2 percent in August, but
lending activity still appears well below levels at which it could strain
In a report last week, Moody's Investors Service predicted
bank lending growth in the UAE would remain subdued over the rest of 2011 at
around 3-5 per cent, compared with 25 per cent in pre-crisis times, and lending
would stay cautious into 2012.
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The real estate market remains weak, with analysts seeing
room for more price declines, and turnover in the UAE's stock markets is
running at half or less of its levels two years ago. Meanwhile, the euro zone
debt crisis and turmoil in global financial markets is clouding the outlook for
asset prices across the world.
So for now, a big outflow of UAE deposits into asset markets
looks unlikely. And if the euro zone crisis worsens further, to the point that
investors start pulling money out of major banks in the West, UAE bank deposits
could once again act as a safe haven, given the high capital levels of UAE
banks and the potential backing of cash-rich Abu Dhabi in an emergency.
Moody's noted that UAE banks had been increasing their
capital over the past two years and that their average Tier 1 capital at
end-2010 was 14.3 percent of assets - very high by global standards and well
above the 6 percent specified by the Basel III banking standards
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