Dubai: Credit growth in the UAE strengthened to 0.5 per cent month on month in February, the fastest pace since September 2016, according to the monthly data from the Central Bank of UAE.

The stronger monthly credit growth in February was largely driven by the government related entities (GRE) segment, which was up 1.9 per cent compared to January following two consecutive months of contraction. Despite the month-on-month growth, annual loan growth decelerated further to 5.4 per cent year on year last month, reflecting the overall soft pace of credit expansion since the fourth quarter of 2016.

“The February data could suggest a tentative pickup in GRE activity as organisations start implementing their 2017 budgets, though we would need to see an ongoing trend developing in the data before confirming this,” said Monica Malik, Chief Economist of Abu Dhabi Commercial Bank (ADCB).

The GRE sector saw the strongest loan growth in 2016 of 9.2 per cent, with the data pointing to a greater reliance on self-funding to meet spending requirements. February data showed private sector credit growth remained weak at 0.2 per cent month on month, resulting in the yearly rate decelerating to 5.4 per cent year on year.

Deposits in the banking sector rose by a solid 1.2 per cent (Dh19.5 billion) month on month in February, supporting the easing in liquidity conditions since end-2016. This monthly increase pushed the annual deposit growth rate to 7.5 per cent year on year last month, up from 6.2 per cent in January.

All segments of domestic deposits improved last month by Dh24.7 billion (1.8 per cent growth) including government, GRE and private deposits seeing a monthly increase. Non-resident deposits have fallen by 3.7 per cent year to date and now account for 12.1 per cent of total banking sector deposits, down from 12.7 per cent in December 2016.

“Government deposits grew by a robust 7.2 per cent non-resident deposits in the banking sector fell by 2.6 per cent last month compared to January, suggesting that banks may have shed their more expensive non-resident deposits given the higher domestic deposits,” said Malik.

With monthly deposit growth outpacing credit growth in February, the gross loan-to-deposit (L-to-D) ratio moderated to 100.3 per cent from 101 per cent in January, the lowest L-to-D ratio since June 2015.

Despite the 25 basis point increase in UAE Central Bank’s repo rate following the US rate hike of quarter of a per cent earlier this month, analysts say the increase in Emirates interbank offered rates (EIBOR) was limited, largely because of the improved liquidity conditions.

Net government deposits in the banking sector rose to Dh26.2 billion in February, up from Dh12.8 billion in January. This is compared to the government being a net creditor from the banking sector in October 2016 by Dh12.3 billion.

The rise in the government’s net deposits in the banking sector has been a central factor behind the improved liquidity, likely supported by the higher oil price and improved fiscal position.