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UAE monetary data points to tightening liquidity conditions

Government-related entity sector continued to be a key driver of credit demand

Gulf News

Dubai: The UAE’s monetary data for October showed tightening liquidity conditions in the banking sector as deposits fell on a monthly basis and loan growth increased.

Deposits fell by 0.4 per cent on a month-on-month basis in October, led by a decline in government deposits.

System-wide deposits contracted by Dh5.5 billion after seeing a solid rise of 2 per cent in September.

The monthly drop resulted in the annual deposit growth rate decelerating to 4.7 per cent year on year in October from 5 per cent in September and the year-to-date growth softening to 2.1 per cent from 2.5 per cent in September.

“Banking sector liquidity has continued to tighten in 2016, with stronger credit growth of 6 per cent year to date than deposit growth 2.1 per cent. This ongoing tightening in liquidity continues to be reflected in Emirates Interbank Offered rates [Eibor] rates rising further,” said Monica Malik, chief economist of Abu Dhabi Commercial Bank (ADCB).

Central bank data and analysis from ADCB showed that the government sector largely drove the fall in October deposits, which declined by 2.5 per cent month-on-month, down Dh8.9 billion.

Government deposits are down by Dh25.3 billion from their recent peak in June. Nevertheless, they are still up 2 per cent year-on-year and 4.1 per cent in the year to date.

While private sector deposits were up 5 per cent year-on-year and 3.5 per cent in the year to date, deposits from government-related entities fell 4.1 per cent year-on-year and 9.2 per cent year-to-date.

Non-resident deposits saw a moderate increase of 0.3 per cent in October compared to September. Non-resident deposits now account for 12.5 per cent of total banking sector deposits, up from 11.6 per cent in December 2015 and 10.8 per cent in December 2014.

Overall, the UAE witnessed soft credit growth, though government-related entities (GREs) are witnessing strong demand. Loan growth was soft in October, decelerating to 0.3 per cent month-on-month compared to 1.1 per cent in September. This was the weakest monthly increase in 2016, except for in April and July when loan growth contracted.

The GRE sector continued to be a key driver of credit demand, which went up 0.3 per cent month-on-month and 7.1 per cent year-on-year, with a greater reliance on bank borrowing and self-funding to meet spending requirements.

“Private-sector credit growth continued to decelerate to 6 per cent year-on-year in October from 6.3 per cent in September. We see this ongoing moderation in private-sector credit growth as reflecting the weaker economic backdrop,” said Malik.

A breakdown of credit growth by sector is not available for October, but the mining, construction and transportation sectors saw the strongest credit growth in 9M2016.

The lower oil price has increased the demand for credit in the mining sector, though this sector only accounts for around 5 per cent of total credit.

Meanwhile, greater working capital requirements and the trend towards contractors needing secure part of the funding for projects is likely supporting credit growth in the construction sector.

Gross loan-to-deposit ratio rose in October with the system-wide gross loan-to-deposit (L-to-D) ratio rose to 104.5 per cent in October, up from 103.8 per cent in September. The L-to-D rate stood at 100.9 per cent in December 2015.