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03 October 2023

'UAE banks largest debtors in GCC'

By Nadim Kawach

UAE banks have remained the largest debtor in the oil-rich Gulf over the past few years because of a surge in borrowing from abroad to meet a sharp growth in demand for domestic credit, according to a key Western finance centre.

The leap in UAE banks' debt by nearly four times in around three years was also a result of a rush by foreign banks to invest their funds in UAE banks in anticipation of an appreciation in the dirham against the US dollar, according to the Washington-based International Institute for Finance (IIF).

From around $23.2 billion (Dh85.2bn) at the end of June 2005, the combined external debt of the UAE's 52 banks jumped to a record $92.5bn at the end of June 2008, said the IIF, which groups several major Western banks.

In a study sent to Emirates Business, IIF said UAE banks remained the largest debtor in GCC at end-June, accounting for nearly 45 per cent of the total GCC bank debt.

"The stock of gross external debt, meanwhile, has risen sharply, driven by substantial increases in private sector borrowing," IIF said.

"GCC states' vulnerability is low by most measures, but external indebtedness rose significantly in recent years. The combined debt of the banks nearly quadrupled between June 2005 and June 2008, while the total combined gross external debt tripled, rising from $110bn in 2005 to $358bn in June 2008 (equivalent to 33 per cent of 2008 GDP)."

The report attributed the rise to a surge in foreign borrowing by banks, particularly in the UAE and Qatar, to fund their domestic loan portfolios, "reflecting an arbitrage opportunity created by high domestic lending rates and expectations of revaluation of the local currency vis-à-vis the US dollar".

The figures showed total external debt by GCC banks peaked at $206.9bn at end-June 2008 compared with $54.9bn at end-June 2005.

A breakdown showed Saudi Arabian banks were the second largest debtors, with a combined external debt of about $41.8bn in June 2008.

Debt was $25.4bn in Bahrain, $24bn in Kuwait and $19.3bn in Qatar. It was as low as $3.9bn in Oman and experts attributed this to the fact that Oman has no plan to revaluate its currency after its decision last year to pull out of the planned GCC monetary union.

The IIF figures showed external debt by non-bank private sector in the 28-year-old GCC has also risen sharply from about $17.5bn to $59.4bn in the same period.