Dubai: Banking sector liquidity is becoming tighter as governments and government-related entities (GREs) continue to draw down their deposits in the banking system.

While tighter liquidity in the banking system may result in a slowdown in credit growth to the private sector, economists do not expect the governments’ fund demand to crowd out funding for the private sector.

“On the contrary, I believe if the government continues to spend, using its reserves and or through deficit financing, the private sector stands to benefit,” said Marios Maratheftis, chief economist of Standard Chartered.

Going forward some analysts expect slow down in credit growth and credit quality to impact bank balance sheets in the UAE. Declining asset prices, particularly, the volatility in the stock markets and a drop in real estate transactions in the UAE are also seen holding back asset growth and asset quality for a few quarters ahead.

According to the Central Bank of UAE data, total credit growth has remained strong in 2015, expanding 8.2 per cent year on year in August. Notably, there has been a change in the drivers of credit growth. Within the private sector, personal loan growth has been accelerating gradually in 2015 (to 8.6 per cent year on in August from 7 per cent in December 2014), which has supported the consumption outlook.

Meanwhile, government loan growth has accelerated to double digits, which analysts say partly reflects the deterioration in the fiscal position. However, government borrowing accounts for only around 12 per cent of total domestic credit.

“We believe that credit demand could well weaken in late 2015 and in 2016 on the back of the softening macroeconomic backdrop and expected rise in borrowing rates. In the retail segment, weaker population growth and slower wage increases will also likely contribute to a deceleration in credit growth. We forecast some moderation in total credit growth to 7.5 per cent in the fourth quarter of 2015 and around 5.8 per cent in 2016,” said Monica Malik, chief economist of Abu Dhabi Commercial Bank.

Analysts expect the UAE banking sector to face a tougher funding environment as draw downs on deposits of government and government-related entities continue while slowing economy on the back of the sharply weaker oil price, filtering into the non-oil economy.