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Central Bank on tap as lenders look to offset decline in deposits

The fund withdrawal was reflected in a sharp decline in the Central Bank's certificates of deposits balance. (IMAD ALAEDDIN)

By Nadim Kawach

Banks in the UAE continued to withdraw their funds from the Central Bank in the second half of 2008 to offset a sharp drop in deposits caused by the exit of foreign hot money, official figures showed yesterday.

After regaining nearly Dh69 billion in the second quarter, the country's 24 national banks and 28 foreign units withdrew a further Dh63bn between June and October, showed the figures by the Central Bank.

The withdrawal was reflected in a sharp decline in the Central Bank's certificates of deposits (CDs) balance from a peak of Dh185.6bn at the end of March to Dh116.7bn at the end of June and around Dh53.6bn at the end of October, according to the figures.

Experts said the decision by the banks to cash their mature CDs was coupled with a halt of CD issuance by the Central Bank to ensure sufficient liquidity for banks and support its recent emergency fund facility for the banking sector.

They said the recovery of nearly Dh132bn in CD investments through most of 2008 allowed the banks to offset a rapid decline in deposits by foreign banks which had sought quick profits from a possible appreciation of dirham and other Gulf currencies against the US dollar.

"As you know, the Central Bank stepped up its issuance of CDs through 2007 and early 2008 to mop up excess liquidity in the market as part of efforts to tackle soaring inflation during the oil boom," said Humam Al Shamma, Financial analyst at the Abu Dhabi-based Al-Fajr Securities. "That policy was reversed after the global economic crisis intensified and banks began to suffer from a liquidity shortage… what compounded the problem was the exit of massive foreign funds, known as hot money… The withdrawal of CDs by UAE banks enabled them to offset the outgoing hot money which led to an increase in credits above deposits for the first time."

Besides such withdrawals, UAE banks continued to benefit from a Dh50bn emergency facility offered by the Central Bank in late 2008 as well as Dh70bn as a federal government deposit with banks.

Bankers said national and foreign banks had used only around Dh10bn from that facility, indicating they still enjoy a good financial position. "This also shows the banks have become more careful and more selective in extending credits," an Abu Dhabi-based bank manager said.

The Central Bank report gave no figures on the banks' deposits and loans at the end of October but its second quarter statistical bulletin showed their combined deposits stood at around Dh833bn at the end of June while their credits to residents and non-residents soared to an all time high of Dh889bn, exceeding deposits for the first time by a ratio of 1.06.

In recent statements, Central Bank Governor Sultan bin Nassir Al-Suwaidi said more than 90 per cent of the hot money had exited the UAE because of abating speculation about a GCC currency revaluation.

He gave no figures but the Saudi American Bank estimated the withdrawn foreign funds at nearly Dh198bn.

Central Bank figures showed speculative foreign money began to leave the UAE in April after recording a rapid rise in 2007.

The figures showed deposits by foreign banks and other foreign liabilities jumped from Dh177.6bn at the end of 2006 to Dh320.9bn at the end of 2007. It began to decline in April 2008 to reach Dh316bn and continued its drop to nearly Dh294bn at the end of June.

Most of the decline was in deposits by foreign banks, slumping from Dh205bn to Dh191bn.

Banks get dh3.7bn in dollar-dirham swap

The UAE Central Bank said yesterday it had provided banks with around Dh3.7 billion through its new dollar-dirham swap facility and urged them to seek more funds to support the domestic economy.

In a statement, the Central Bank said the strong demand for funds through the facility that was introduced just before the end of last year had pushed down Ebor (Emirates Inter-Bank Offer Rate).

While this decrease is more pronounced at the short end (one month period), the longer term rates between two and 12 months, have also declined, it said.

"The Central Bank has provided banks operating in the UAE with dirham funds amounting to Dh3.7bn so far via dollar-dirham swaps," the bank said.

"The Central Bank would like to encourage banks to use the various liquidity providing facilities offered by it, namely the dollar-dirham swap and the discount facility.

"Their wider usage will further push Ebor rates down and help the UAE economy in performing to its potential."