The UAE must slash soaring interest rates, pump more funds into the banking system and put more public projects into the market as part of an urgent rescue plan intended to spur economic growth, a senior official says.
Abdul Aziz Al Ghurair, Speaker of the Federal National Council (FNC), said the country’s banking sector is in a good shape but the non-oil economy has been dormant and could remain so unless stimulus measures are taken.
Ghurair, also chief executive president of Mashreq Bank, said interest rates in the UAE are far higher than those in other Gulf oil producers or the United States and that measures taken by the central bank to lower them were ineffective.
In an interview with the Arabic language daily Alkhaleej, he proposed that UAE sovereign wealth funds inject Dh150 billion into the country’s financial system to trigger lending, adding that such funds could be withdrawn by SWFs once the financial and economic system is back on track.
“If you ask me about the capital adequacy of the UAE banks, I can tell you that it is at its best in the country’s history…the banking situation is very good and I believe the banks have enough guts to allocate more provisions in the next period…..I don’t think there is any problem in the UAE banking sector but there is a problem in the domestic economy,” he said.
“The banking sector in the UAE is far ahead of the economic sector, which is suffering from a real problem…most non-oil economic sectors have been dormant and are not recording any real growth…with all frankness and transparency, I say that I could be optimistic about our economy only if a set of urgent stimulant measures are taken…otherwise, we will not see any real progress in the economic for the next three years.”
Ghurair was asked if he supported plans similar to monetary-easing measures taken by the US, when it pumped $600 billion into the market within post-crisis rescue schemes that also included printing of $1.7 trillion worth of notes.
“I am not saying such measures should be taken now…but there are other measures that must be taken by the UAE urgent…let’s leave the printing of currency notes for now as the last weapon…there must be a stimulant plan..I can tell you that the government has succeeded in its first plans when it injected liquidity and guaranteed deposits…but these measures covered the first phase after the crisis and we are now in a new phase, which requires new decisions and new measures,” Ghurair said.
“First, the government should put more infrastructure projects into the market covering schools, ports, housing, health and education to stimulate the economy….second, it is extremely important that the issue of high interest rates is tackled…rates in the UAE are very high for borrowers and depositors…banks have raised rates on deposits to 4.-6 per cent while they are only 1-1.5 per cent in neighbouring countries and below one per cent in the US,” he said.
“High rates have increased the costs of lending…the main reason for our inability to cut rates is that government and semi-government institutions are conducting auctions on their deposits, which is sparking competition for their deposits and consequently pushing up interest rates…so if you manage to get a government deposit for a four-per cent rate, then what will the lending rate be….?”
Ghurair said there must be a government initiative to trim rates, adding that a two-per cent interest on a government deposit will cut lending rates and this will expand liquidity in the market.
“This will benefit all…I can say it frankly again that no one is benefiting from high rates…the central bank has tried to secretly interfere in cutting rates but could not…the central bank wants the inter-bank rates to be around 1.5 per cent but how cant his be when rates on deposits are five per cent…this does not make sense…nominal intervention is something and actual intervention is something else…all government and semi-government establishments must act to put public interests above their own interests by accepting lower rates…I think what we need is a bold decision from the decision-makers.”
Ghurair said the UAE market is “thirsty” for liquidity because of the credit squeeze by local banks, referring to the recent call by the central bank governor and some cabinet ministers on banks to open their lending purses. “But if we have a liquidity shortage, how are these banks going to lend,” he said.
Ghurair said the rescue plan should also include the opening of what he described as a “window” in the central bank to entice banks to put their funds in investment certificates. He said such an investment window would largely benefit banks and stop “their race for attracting deposits.”
“Another feature of this plan could include more fund injections…I don’t see why UAE SWFs can not inject funds through our government institutions…I am talking about Dh150 billion…this liquidity could be withdrawn back by the SWFs once the situation is back to normal.”
Worst is over for banking sector: Al Ghurair
The UAE economy is on the path of recovery and the worst is over for the banking sector, believes a top banking official.
Abdul Aziz Al Ghurair, Chief Executive Officer of Mashreq, is optimistic about UAE's economic recovery and the growth of its banking sector. However, he urges for concerted action by the Central Bank and the governmentto revive loan growth, according to a report in 'Gulf News'.
Speaking of transparency, Al Ghurair said Mashreq is very transparent and conservative when it comes to recognising NPL. Banks should not allowed to hide the problem assets over a period of three r four years, he said.
The last two years there was little growth on the assets as most international growth disappeared. Some domestic customers saw thier businesses grow and others resheduled the loans. Therefore, Mahreq decided to shrink its deposits.
Similarly, the bank has accommodated customers in trouble and have helped them reshedule the loans, he added.
With regards to credit, Al Ghuraiar said banks are no longer as aggresive as it used to be in the past. For instance, Mashreq has laid down strict conditions on lending nd this has put pressure oncorporate lending. The GDP of the country has to grow to spruce up demand, he said. Large-scale government spending is the need of the hour.
Al Ghurair said edposit to loan rationin the UAE, which is almost one to one, there is not much liquidity in the market. Banks are scrambling for deposits mainly to meet Central Bank guidelines. So the government will have to pump more cash into the system.
One way to ease liquidity for banks is by the government buying all highly rated securities held by banks. "If you want to kick-start the economy, the banking sector needs to be kick-started first and the cost of borrowing brought down," he said. The Dh71bn should be released to the banking sector, he added.
To bring the cost of funds, government departments must stop tendering deposits through auction because by doing so they are setting a benchmark for deposits, Al Ghurair said. "The total loan size in the UAE economy is more than Dh1 trillion. If we have a drop of 2 per cent in the cost of borrowing, Dh20 billion will be released into the economy," he reasoned.
With regards to the fall in provisions for bad loans for most UAE banks in the fourth quarter, Al Ghurair said: "It can't get any worse than what we have seen. I think there are still signs of stress in the economy. Looking at our retail and corporatev customers, I can say that may of them are stretched. They are genuine customers. Even in this year we will see some banks continuing to make provisions, but the banking system as a whole is healthy."