The days of very easy money are drawing to a close in the rich Gulf Arab oil-exporting economies as money market rates start to rise, partly because of the damage which cheap oil is doing to government finances.
Loose liquidity created by inflows of oil money pushed short-term rates in Saudi Arabia, the United Arab Emirates and neighbouring states to record lows last year, fuelling frenzied competition among banks to lend to firms at tiny spreads.
But in the last few days, money rates have started to rise relatively sharply. If this continues, banks could begin to regain some pricing power over their loans.
One reason for higher rates is expectations for US monetary tightening this year. With their currencies pegged or closely linked to the US dollar, Gulf central banks would probably tighten too.
But a bigger factor is the plunge of oil prices since mid-2014, which has slashed governments’ oil revenues, threatening to shrink flows of money into Gulf banks.
“The days of easy money are over,” said a senior banker at a state-run UAE commercial bank, declining to be named because of the subject’s sensitivity.
“Dragging oil prices and expectations that increased exports from Iran will add to the global supply glut are unnerving the money market, which previously held rates at rock-bottom levels for several months.”
The UAE’s three-month Emirates Interbank Offered Rate (EIBOR), at a record low 0.68 per cent as recently as February, jumped 3 basis points in the past day to 0.79 per cent, a 17-month high.
The three-month Saudi equivalent, essentially flat at a record low of 0.77 per cent since March, climbed in the past few days to nearly 0.80 per cent. Rates in Qatar, Kuwait and Bahrain also rose.
“In general, UAE banks’ net interest margins tend to be positively geared to higher EIBOR rates, which have been on an upward trend year-to-date,” said NBK Capital analyst Aarthi Chandrasekaran.
Many Gulf companies have refinanced debt on cheaper terms over the past year; those that have not yet done so could find they risk missing the boat.
So far, bankers don’t expect a squeeze that might cause money rates to soar.
The UAE banker said he believed that if the US Federal Reserve tightened 25 bps, EIBOR might rise roughly 50 bps. That would bring the three-month rate above 1.0 per cent, to where it was in early 2013.
Finance ministries and central banks have been working with considerable success to protect banking systems from any drastic tightening. Several governments have huge financial reserves overseas; they have liquidated some of them and brought money home, keeping local markets flush with funds.
In the last few weeks, however, there have been signs this strategy has its limits. National Bank of Abu Dhabi said last week its deposits had shrunk 3.1 per cent year-on-year because of lower government deposits.
Chief executive Alex Thursby said he didn’t expect more big outflows of government funds, but added: “There’s a major dollar liquidity squeeze in the UAE and the region due to lower oil sales and dollars moving to different markets.”
The ratio of gross credit to deposits at UAE banks climbed to 100.2 per cent in June from 97.0 per cent last December and 95.0 pct in June 2014 – a shift that has alarmed some bankers, and may prompt some to raise deposit rates to fight for money.
In Saudi Arabia, deposits have continued growing strongly. But Riyadh is running a much bigger budget deficit than the UAE, so last month it started issuing sovereign bonds for the first time since 2007.
Some analysts think its sovereign bond issues may total up to SR200 billion ($53 billion) by year-end. Commercial banks hold nearly 300 billion riyals in central bank bills and non-statutory central bank deposits, and may simply switch some into bonds – but by 2016, bond issuance could start sucking funds from money markets.
Kuwait is considering whether to issue bonds to finance its deficit; Oman and Bahrain are expected to issue more while oil remains cheap.
“More Gulf nations are likely to access the bond markets to plug deficits following in Saudi’s footsteps, as they cannot sustain the rate at which they are drawing funds from their reserves,” said a foreign bank’s head of markets.
“The rising loan-to-deposit ratio in the UAE is a sign that liquidity in the region is shrinking.” – Reuters
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