UAE interbank offered rates at fresh 7-year low

Analysts cite high liquidity, central bank rulings for sliding lending rate
UAE interbank offered rates at fresh 7-year low
(Getty Images)
By Reuters
Sun 24 Jul 2011 04:24 PM

Interbank offered rates in the United Arab Emirates
continued their slide to a fresh seven-year low on Sunday, as liquidity in the
OPEC member's banking sector stayed high, also dragging one-year dirham
forwards lower.

Bank deposits had risen to their highest level in at least
two years in April as the Gulf Arab state enjoyed a safe-haven status amid
regional unrest, but dropped again slightly in May.

The benchmark three-month interbank offered rate, based on
quotes from a dozen banks, was set at 1.505 percent at Sunday's fixing, the
lowest level since June 2004. Before Dubai's debt crisis in November 2009, the
rate was 1.915 percent.

The rate remains, however, well above the Saudi benchmark of
0.600 percent.

"It is the high liquidity and the banks now falling in
line with what is required by the central bank. A few of the banks who have had
higher rates have now brought the rates in line with the other banks which has
brought the average down," said Lyndon Loos, head of forex trading for
Middle East and North Africa at Standard Chartered in Dubai.

"The banks are now falling in line with what is
required by the central bank, which is making the three-month EIBOR come off
quite considerably," he said.

In May, the central bank urged banks to bring rates down and
increase lending after September's debt restructuring deal with Dubai World.

Deposits at UAE banks stood slightly lower at AED1.124
trillion ($306bn) in May, down 0.4 percent from the previous month, central
bank data showed.

Loans and advances increased by 2.7 percent year-on-year at
the end of May after a 3.2 percent rise in the previous month. However, banks
are still cautious about lending following Dubai's $25bn debt restructuring
last year and a still weak property sector.

UAE private sector credit growth has been anaemic, at a mere
0.2 percent year-on-year in April, compared with annual rates of well over 50
percent in the oil-boom year of 2008.

Investors perceive the UAE - together with Qatar the only
Gulf Arab states to have escaped regional unrest - as a safe- haven bet
benefiting from inflows from Bahrain, where Sunni rulers crushed weeks of
protests led mostly by the Shi'ite majority demanding democratic reforms in
March.

The UAE pledged to spend $1.6bn in less-developed northern
emirates, introduced bread and rice subsidies and hiked military pensions among
other measures.

Improved liquidity in the UAE, the second-largest Arab
economy, has also helped push currency forwards down over the past five months.

"There is quite a bit of local currency liquidity
available within the country which is basically keeping short-term rates lower
and the forex swaps also," Loos said.

One-year dirham forwards were quoted at -6.5/0.5 points on
Sunday, compared with a peak of 45 points at the beginning of March. Forwards
now imply the dirham will hold close to its 3.6725 peg to the dollar over a
one-year period.

Dubai's credit default swaps , the cost of insuring the
emirate's debt against default for five years, stood at 332.5 basis points on
Thursday, up from 327.6 points earlier this month, according to Markit.

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