Foreign banks took out Dh35bn

Foreign banks siphoned nearly Dh35 billion out of the UAE’s banking system in the first 10 months of 2010 in a reversal of their previous rush for investment following growing speculation about an appreciation of the dirham against the US dollar.

From around Dh93.1 billion at the end of 2009, their deposits with the UAE’s 23 banks and 28 foreign units plunged to nearly Dh57.9 billion at the end of November 2010, figures by the central bank showed.

The bulk of the withdrawal was in the first half of 2010, when their deposits tumbled by around Dh40 billion to Dh53.7 billion before they started to edge up and stabilize in the following months.

Analysts said the slight recovery in the following months was a result of an improvement in local stock markets, better rates offered by UAE banks and the re-emergence of investment opportunities in the country following the post-crisis downturn.

Most of the decline in the first 10 months of last year was in time deposits which plunged from around Dh86.4 billion to Dh43.3 billion I the same period. Demand deposits, where have remained much lower, shot up from Dh6.6 billion to Dh16.6 billion.

Funds siphoned out of the UAE by foreign banks reached their height during 2009, when they stood at around Dh83 billion. In the first seven months of 2010, they stood at nearly Dh32 billion although they recorded their first increase of about Dhseven billion in July in more than a year, the report showed.

The deposits by foreign banks had hit an all time high of nearly Dh211 billion at the end of April 2008 at the height of speculation that the UAE and other Gulf oil producers would appreciate their currencies against the US dollar.

Speculation began to recede after the UAE Central Bank repeatedly ruled out such plans and came almost to a standstill last year after the country decided to withdraw from the monetary union launched by Saudi Arabia, Kuwait, Qatar and Bahrain. The other GCC member, Oman, also pulled out in late 2007.

The drive by speculators to pull their funds out of the UAE and other Gulf nations gained momentum after the eruption of the 2008 global fiscal crisis as foreign banks struggled to meet commitments and bridge a liquidity gap at home.

The plunge in the foreign banks’ deposits at the end of November pushed them to one of their lowest levels since mid 2006, when they stood at around Dh75 billion.

They swelled to nearly Dh96.7 billion at the end of 2006 and shot up to about Dh205 billion at the end of 2007. In April 2008, they climbed to a record high level before they began to fall back in the aftermath of the crisis to reach nearly Dh175.6 billion at the end of 2008.

“These funds were mostly speculative money, or in other words, hot money…they were here for speculation in the stock market and to make quick profits from bank deposits in case the UAE appreciated its currency against the US dollar,” said Humam Al Shamma, financial analyst at the Abu Dhabi-based Al Fajr Securities, a key UAE stocks and investment firm.

The decline in those deposits depressed the overall foreign liabilities of the UAE’s banking sector from a record high of Dh320.9 billion at the end of 2007 to Dh282.5 billion at the end of 2008 and about Dh251 billion at the end of 2009. But they recovered to around Dh282 billion at the end of November.

The recovery was caused by a surge in due to banks to around Dh76 billion at the end of November from Dh37.8 billion at the end of 2009. Other deposits also soared to Dh117.9 billion from Dh88.2 billion.

By contrast, the UAE banks’ foreign assets climbed from around Dh196 billion at the end of 2007 to Dh203 billion at the end of 2008 and Dh243 billion at the end of November. This narrowed the banks’ debtor status to Dh39 billion at the end of November from Dh43 billion at the end of 2009 and Dh79 billion at the end of 2008.

Despite the withdrawal of those funds, overall deposits with the UAE’s banks gained a staggering Dh67 billion to reach around Dh1,049 billion at the end of November.

The rise was a result of a sharp increase in individual deposits, which grew to nearly Dh282 billion at the end of November from Dh259 billion at the end of 2009. Private sector deposits swelled to Dh380 billion from Dh372 billion while government deposits dropped to Dh186 billion from Dh192 billion.

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