Monica Malik Image Credit: Gulf News Archives

Dubai: Gross credit growth in the UAE accelerated 0.7 per cent month on month 4.3 per cent year on year in June, according to the latest central bank data analysed by Abu Dhabi Commercial Bank (ADCB’s) Economics Team.

“The monthly expansion in June was the strongest level seen so far this year, though could have been partly due to some pent-up demand among corporates following the generally quieter period during Ramadan (which fell in May),” said Monica Malik, Chief Economist of ADCB.

Data showed the strongest monthly growth in credit was from the government-related entities (GRE) (1.7 per cent month on month) and private businesses (1.1 per cent), whilst government gross loans contracted by 1.6 per cent.

The pace of monthly credit growth averaged 0.4 per cent month on month in the first half of 2019, in line with the same period in 2018, though the drivers have shifted.

GREs lead

GREs witnessed the strongest credit growth YTD (year to date) of 5.3 per cent after contracting by 2.6 per cent in 2018. “We believe that this potentially reflects some progress being made with projects in Abu Dhabi and greater investment activity in Dubai to complete infrastructure ahead of Expo 2020. However, the domestic and external economic challenges are reflected in the deceleration in private sector credit demand,” said Malik.

Data showed, private businesses’ credit growth has moderated from end-2018, while retail has contracted by 1.5 per cent year on year and YTD. Retail credit was flat in June after contracting in monthly terms in the first five months of 019, though we await further data to confirm a stabilisation.

Deposits rise

Deposits across the UAE banking system rose 0.9 per cent month on month in June (Dh15.4 billion) after contracting by 0.8 per cent in May. As a result, the yearly growth rate ticked up to 5.3 per cent year on year from 5.2 per cent in the previous month. The rise in June deposits was largely driven by a 15.9 per cent month jump in GRE deposits, with the government and private sectors seeing a monthly fall.

“Net government and GRE deposits in the banking system strengthened in June, reflecting the jump in GRE deposits, and rising close to the fourth quarter 2018 peak. Meanwhile, gross non-resident deposits fell by 6.0 per cent month-on-month in June and are down 7.8 per cent YTD. This likely reflects banks shedding generally more expensive foreign deposits on the back of having sufficient domestic liquidity,” said Thirumalai Nagesh, an economist at ADCB.

Non-resident deposits account for 11.1 per cent of total gross deposits in June, down from 12.2 per cent at end-2018.

The data continues to suggest that the banking system is highly liquid and with the lowering of interest rates by 25 basis points effective August 1, in line with the Fed rate cut is expected to support loan demand.

“The 3-month Eibor rate was already pricing in a rate cut, and trading below the repo rate from May to July. Lower interest rates are positive for reducing debt-servicing costs, though we are cautious on the potential additional support to credit demand with the economic headwinds,” said Malik.