Expansionary policy to stay

The UAE central bank will maintain its monetary expansionary policy and keep interest rates low in a bid to encourage banks to expand lending to contribute to economic growth, its governor has said.

Sultan bin Nasser al Suwaidi said he believed banks in the UAE are not “too risk averse” despite a sharp slowdown in domestic credit, adding that large repayments of short term loans are hiding the real credit activity.

The bond market in the UAE is “underdeveloped” and measures are needed to expand such activity, Suwaidi was quoted in Oxford Business Group’s Abu Dhabi 2010 report as saying.

“We believe that the economic situation globally will continue to be under pressure, and therefore our monetary policy will continue to be expansionary and interest rates will be kept low. We didn’t see any reason to change the reserve requirements of our banks because we took control to balance things when it comes to the multiplier,” he said in the interview, obtained by Emirates 24/7.

“We are also not encouraging banks to give loans without studying carefully the risks and adding the extra cost of risk to the loan package. Of course, that will naturally depress the process of giving loans. Expansion of credit is controlled, not directly controlled, but regulatory controls are there nevertheless. I think these are the most important pillars….the other pillar is to provide liquidity to the banking system through the UAE Central Bank.”

Banks in the UAE and other Gulf oil producers have been described by analysts as becoming more risk-averse in the aftermath of the 2008 global fiscal distress and regional debt default problems.

Such a policy has allied with waning private sector demand for credit and a drive by banks to build up loan loss provisions to stifle lending in the region. Official data showed GCC bank credit grew by only around 2.5 per cent in the first half of 2010 and nearly 2.2 per cent in 2009 compared with as high as 33.4 per cent in 2008 and 34.4 per cent in 2007 at the height of the latest oil boom era.

In the UAE, central bank figures showed credit growth stood at around two per cent in the first nine months of 2010 against 2.4 per cent in 2009 and nearly 35 per cent in the previous two years.

Suwaidi was asked if he was concerned that UAE banks could become too risk averse when it comes to lending.

“I am not overly concerned on this front because banks in the UAE are mainly retail commercial banks. This means the system benefits from the inherent strength of business banking, while also having the advantages associated with retail – such as the deposits of individual customers. Against this backdrop, UAE banks are very solid, with high liquidity and a central bank that is financially supportive,” he was quoted as saying.

“That said, however, banking is of course a risk-related venture, and institutions must look at risks carefully with regard to lending. Another reason why I don’t think banks are becoming too risk averse is the fact that there is high lending activity. Because most loans are shorter, we are witnessing a flood of repayments.  As a result of this, money continues to circulate even if there is limited growth for the total portfolio.”

Suwaidi said the central bank still adopts a tough stand towards the loan-to-deposit requirement in the UAE to avert fresh banking crises.

“I think we cut ourselves a difficult path because nobody else in the world would label deposits like we do; we’re very conservative. Don’t just look at the title, look at the underlying definition. I think if you compare the UAE to other areas, you will find the definition is extremely conservative, very solid and doesn’t reveal at first the strength that is inherent in it.”

Suwaidi said he believed there was no “shut-off” by banks in the UAE regarding loans to the private sector, adding they provide credit when they see “opportunities and when they see repayments are coming.”

“There are still many companies operating in the UAE with high cash flows and high rental income. Some real estate projects are earning rental income that is beyond their benchmark or breakeven point,” he said.

“Of course, having said that, there are many loans that go to real estate projects that are not yet finished. But the UAE economy is open, dynamic and robust.

Banks will decide what opportunities are right for them.”

He said banks could get extra liquidity through bonds but added that corporate bond markets in the UAE remain “underdeveloped.”

“We need to expand these. Of course, I want the standards to be high for issuing these bonds. Standards, credit ratings and amounts would all have to be met. All these control issues have to be identified and trusted to something like a debt management or control office,” he said.

“People don’t realize that these have implications beyond the normal bilateral loans and therefore should be controlled across the federation. In all the emirates there has to be one centre where these are applied for, registered and approved.”

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