Business | Banking
Liquidity crunch may ease by March
The acute liquidity shortage experienced by the UAE's financial system is likely to ease in the first quarter of 2009.
- By Babu Das Augustine, Banking Editor
- Published: 23:51 December 21, 2008
Dubai: The acute liquidity shortage experienced by the UAE's financial system is likely to ease in the first quarter of 2009.
However, absence of adequate monetary tools is undermining the process of addressing liquidity into the system, according to a report from Standard Chartered Bank.
"The (UAE) authorities have the willingness and the financial strength to address the problem, but the absence of the necessary monetary tools will undermine the process. Given the financial strength and the willingness of the authorities, we expect liquidity in the UAE to begin to normalise in the first quarter of 2009," said Marios Maratheftis, regional head of Research, Middle East, Pakistan and North Africa for the bank in the UAE.
According to Standard Chartered, given the current liquidity shortage, the UAE's economic growth is expected to slow from 4.8 per cent in 2008 to 2.7 per cent in 2009.
In contrast, the impact of the liquidity shortage on the Saudi economy is projected to be less severe.
"When liquidity conditions became tighter, the Saudi Arabian Monetary Agency (SAMA) had more tools at its disposal to manage the situation. As a result, liquidity conditions in Saudi Arabia are now normal. Given that Saudi Arabia has managed to maintain liquidity at adequate levels, we only expect growth to drop to 2 per cent in 2009 from 2.7 per cent in 2008," said Maratheftis.
So far, the UAE has committed a total of Dh120 billion in the form of Dh50 billion liquidity support to the banks and additional Dh70 billion direct injections into the banking system. But despite such decisive policy response, liquidity remains relatively tight, with the one-month EIBOR (Emirates interbank rate) at 4.30 per cent even with the official repo rate at 1.5 per cent. This implies that the monetary policy transmission mechanism in the UAE is not functioning properly.
The transmission mechanism usually works as follows: Monetary authorities set policy rates (the repo rate). The rates then begin to affect market interest rates, asset prices, market expectations, and, in the case of free-floating currencies, the exchange rate.
In the UAE, the transmission mechanism faces problems right from the beginning of the chain, as policy rates are not having the desired impact on market rates. Until very recently, the UAE was experiencing massive foreign capital inflows as markets anticipated a dirham revaluation. However, as soon as the inflows reversed, transmission mechanism problems became very clear.
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