Dubai: The UAE’s credit growth showed signs of gradual pick up with the gross credit growth accelerating to 0.3 per cent month on month in May, up from 0.1 per cent in April, according to the latest data from the UAE Central Bank.

Credit data analysed by the Economics Team at Abu Dhabi Commercial Bank (ADCB) showed the average monthly pace of loan growth in the first five months of 2019 slowed to 0.3 per cent month on month from 0.5 per cent in the same period in 2018, and annual credit growth has decelerated to 4 per cent in May from 4.8 per cent in December 2018.

Closer analysis of data showed the government (+1.6 per cent) and government-related entities GRE (+0.9 per cent) segments were largely behind the May acceleration in monthly terms, and on a year to date basis have expanded at a stronger pace than the private sector.

“We believe that the higher government and GRE credit demand could be partly linked to a pickup in investment activity with some traction in Abu Dhabi’s project activity and in relation to Expo 2020 in Dubai [direct and indirect]; and the government’s shift to a more expansionary stance,” said Monica Malik, Chief Economist of ADCB.

Despite the government and GRE-driven pick up in credit growth last month, data continues to reflect the current challenges facing the economy. Private sector loan growth contracted by 0.1 per cent month on month in May, resulting in the yearly growth figure slowing to 2.5 per cent year on year from the recent high of 5.6 per cent in June 2018. Both the corporate and retail segments saw a monthly drop in May and loan growth to individuals has contracted by 1.5 per cent year on year.

Deposits fall

System-wide deposits fell by 0.8 per cent month on month in May, but remains up 5.2 per cent year on year and continues to outstrip credit growth on an annual basis. The monthly drop in May was due to resident deposits (-1.1 per cent month on month) with both the GRE and private sectors seeing a drop. However, net government and GRE deposits still remain historically high and above the mid-2018 and end first quarter 2019 levels.

Tightening liquidity

The overall data for the first five months of 2019 suggests greater spending by GREs with a fall in deposits (-0.5 per cent year on year) and increased borrowing (3.2 per cent) after the segment deleveraged for much of the past two years.

“Non-resident deposits increased by 1.8 per cent month on month, the first monthly rise this year. This likely reflect some tightening of liquidity for some banks, resulting in them looking for overseas deposits, which tend to be more expensive. Non-resident deposits accounted for 11.9 per cent of the total in May, from 12.2 per cent in end-2018,” said Thirumalai Nagesh, an economist at ADCB.

Although, banking sector liquidity is seen as comfortable, there are signs of some tightening. The loan-to-deposit (L-to-D) ratio rose in May to 95.6 per cent from 94.6 in April, the highest this year, on the back of the monthly fall in deposits and increase in gross loans.

The L-to-D ratio still suggests an overall comfortable liquidity position in the UAE banking system with the reading still lower than the levels in the first half of 2018. Despite the May tightening in system-wide liquidity, the three month Eibor rate has moderated from mid-April, in line with US Libor.

“We believe that the fall in the US Libor rate reflects the market pricing in cuts to the Federal Fund Rate. We believe that the Fed will continue its wait- and-see approach in the near term as it gauges the momentum in the US and global economies,” said Malik.