Business | Economy
Departure of speculative money weakens liquidity
The departure of speculative money, which was increasing in line with expectations of a likely revaluation of the UAE currency, is one of the major causes of the weakened liquidity in the UAE's banking system, rating agency Moody's said in a report on Monday.
- Staff Report
- Published: 23:35 November 24, 2008
Dubai: The departure of speculative money, which was increasing in line with expectations of a likely revaluation of the UAE currency, is one of the major causes of the weakened liquidity in the UAE's banking system, rating agency Moody's said in a report on Monday.
Sources of problem
The sustained disruption to foreign market funding, the substantial irrevocable loan commitments to existing clients that need to be serviced, and the potential need for refinancing existing corporate debt as it matures, have also been identified by Moody's as the root cause of the current liquidity crunch.
"A continued rise in loan-to-deposit ratios and sustained challenges in global liquidity conditions will lead to an intensification of negative rating pressures," said John Tofarides, a Dubai/DIFC-based Analyst in Moody's Financial Institutions Group.
As international debt capital markets are now effectively closed to most issuers and overall risk tolerance is reduced for financial institutions, risks related to liquidity and external funding needs have increased.
In order to alleviate the liquidity shortage, the UAE government has pumped in Dh120 billion.
"The government's measures contribute to providing a short-term solution and renewing confidence in the banking sector. However, liquidity stress may inhibit asset growth over the medium term," said Tofarides.
Looking ahead, Moody's expects the liquidity crisis to slowdown in domestic loan growth for 2009, with some banks possibly showing negative growth, increased pressures on net interest margins due to high borrowing costs, and stringent regulation by the central bank in terms of scrutinising loans and advances.
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