UAE money supply slackens in 2010

Money supply in the UAE has sharply slowed down this year as domestic deposits edged up at a modest pace and local banks continued to maintain the lid on their lending purses, according to official data.

Analysts said the slackening money supply reflected stifled inflation despite a weakening in the US dollar and a surge in the bill of imported foodstuffs.

M 2, which includes currency outside banks, demand deposits, time and savings deposits, had jumped by more than 10 per cent on a quarterly basis through 2007 and 2008 as banks went on a lending bonanza to take advantage of an economic and business upsurge not seen since the first oil boom 40 years ago.

Money supply was also as high as 10.8 per cent year-on-year in the first quarter of 2009 but tumbled to 6.2 per cent in the second quarter of that year and 6.9 per cent in the third quarter. It rebounded to 9.7 per cent in the fourth quarter before slipping to nearly eight per cent in the first quarter of 2010.

The rate slumped to 5.4 per cent in the second quarter of 2010 and dipped further to about 5.2 per cent in the third quarter, according to the Central Bank.

Its figures showed M2, which is usually used by economists to predict inflation, grew from around Dh728.8 billion at the end of the third quarter of 2009 to around Dh766.5 billion at the end of the third quarter of 2010.

M2 growth was also as low as 1.2 per cent Q-on-Q in the second quarter of this year and around 1.1 per cent in the third quarter.

It reached one of its highest levels of 8.3 per cent Q-on-Q in the second quarter of 2008 and around 3.7 per cent Q-on-Q in the second quarter of 2009.

“The liquidity situation in the UAE is much better now that that after the eruption of the 2008 crisis…but deposits have grown slowly over the past months and banks are still tight in their lending activity,” said an Abu Dhabi-based economist.

“Another factor affecting money supply is the waning demand by the private sector to spend or to borrow from banks…these factors along with the decline in the real estate sector are putting much downward pressure on inflation.”

Inflation in the UAE stood at only 0.54 per cent in the first eight months of 2010 and could end the year at as low as one per cent because of lower rents and a fall in prices of other items, according to government data.

Despite a surge in petrol prices and a sustained increase in education fees, inflation has remained at one of its lowest levels so far this year to extend a downward trend since 2009, when the rate dived to just about 1.5 per cent from one of its highest levels of nearly 12.3 per cent in 2008.

Figures by the government National Bureau of Statistics (NBS) showed the consumer price index (CPI) rose by only around 0.9 per cent year-on-year in August, fueled by an increase in food and petrol prices, as well as a surge in education, culture and home supplies.

But housing continued to reverse a sharp sustained increase over the previous two years and declined in August by around 1.3 per cent mainly due to lower rents in Abu Dhabi and Dubai, the largest emirates in the country.

“Inflation in the UAE is much influenced by rents and food prices as these categories account for nearly 40 per cent of the price index,” the economist said. “The downturn in the property sector in the aftermath of the crisis was the main reason for sharp fall inflation last year.”

Despite a pick up in bank credit in the third quarter, it has remained very slow this year, with growth standing at only around two per cent during the first nine months. Credit growth peaked at around 35 per cent through 2007 and nearly 30 per cent in 2008 before sliding to about 2.4 per cent during 2009.

Deposits with the country’s 51 banks swelled to a record high of around Dh1,038 billion at the end of September but they were only 3.1 per cent higher than their level of nearly Dh982 billion at the end of 2009.

In a recent study, the Kuwaiti-based Global Investment House said the fall in UAE inflation in 2009 was also a result of the global fiscal crisis, which is forcing consumers to save more money and spend less, adding that this is placing a downward pressure on price levels.

“Likewise, private investment expenditures by foreigners decreased which lowered prices by slowing aggregate demand. A positive influence of the low inflation rate of 2009 is that it is lowering production costs and improving the competitiveness of the economy,” the report said.

Latest data by the International Monetary Fund showed broad money growth in the UAE peaked at 41.7 per cent in 2007 before falling to around 19.2 per cent in 2008. It plunged to only about 9.8 per cent in 2009 and is projected to dip further to nearly six per cent in 2011 before recovering slightly to 6.3 per cent in 2012.

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