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Mon 27 Oct 2008 10:32 AM

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UAE liquidity crunch stabilising - central banker

UPDATE 1: Banks have tapped $2bn of $13.6bn emergency funding facility, Al-Suweidi says.

A liquidity crunch in the United Arab Emirates banking sector was stabilising as banks tap emergency funds and the government pours money into long-term deposits, the Gulf state's central bank governor said on Monday.

Struggling to maintain banks' liquidity as they face the fallout from a global financial crisis, the UAE central bank last month opened a 50 billion-dirham emergency facility, with the funds offered to banks at a premium to market rates.

The UAE Ministry of Finance said last week it was injecting a separate 25 billion dirhams of funds directly into the banking system, which central bank governor Sultan Nasser Al-Suweidi said on Monday were taking the form of long-term deposits.

"Things are getting better and stabilising," Al-Suweidi told reporters when asked whether the central bank had done enough to cushion the banking sector from the credit crisis.

"As part of our measures we are examining the loans and deposits of all banks to determine whether we need to make extra provisions and we'll make them if needed," he added on the sidelines of a conference in the UAE capital, Abu Dhabi.

Tight interbank markets across the Gulf region have left lenders struggling to finance massive infrastructure and industry projects designed to wean the Gulf away from a reliance on oil export revenues.

But banks in the UAE have tapped only 7.5 billion dirhams ($2.0 billion) - or 15 percent - of the central bank's emergency facility, Al-Suweidi said.

UAE banks have said they are wary of drawing on the central bank's facility, which in most cases forces them to comply with conditions, such as limiting growth in fresh credit and general expenses, and liquidating their interbank lending positions.

In a bid to boost confidence in the health of the financial sector, the second-largest Arab economy said this month it would guarantee all bank deposits and interbank lending - the first state to do so in the oil-exporting region.

The finance ministry's 25-billion dirham injection, meanwhile, is part of a larger 70 billion dirham funding package for banks that will be introduced in stages.

"These measures... helped to improve the situation," Al-Suweidi said.

UAE interbank rates have levelled off since the measures were introduced, after more than doubling in four months. The three-month Emirates Interbank Offered Rate rose to 4.7373 percent on Monday from 4.725 percent last week.

"The immediate reason for the liquidity outflow from the UAE was the sudden exit of hot money that was piling up to take advantage of the widely expected UAE dirham revaluation which was ruled out just before summer," Al-Suweidi said.

The global crisis had "exacerbated the situation", he added.

Gulf oil producers, including Saudi Arabia, have thus far adopted separate measures to address the global financial crisis, saying after a weekend meeting they would coordinate their policies more closely.

The six members of the Gulf Cooperation Council (GCC), excluding Oman, are preparing for monetary union by an unlikely 2010 deadline. The global downturn could "speed up" rather than slow down the region's single currency plans, Al-Suweidi said. (Reuters)

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