UAE's net foreign assets down by Dh30bn in Q1

A surge in dirham-denominated deposits by foreign financial institutions with local banks slashed the UAE's net foreign assets by nearly Dh30 billion in the first quarter of this year, according to the UAE Central Bank.

At the end of March, the country's total net foreign assets stood at Dh132.4 billion compared with Dh163.07 billion, a decline of around Dh30.6 billion in just three months, the Central Bank's quarterly bulletin showed.

The figures showed the decline was caused mainly by a sharp rise in foreign liabilities, mostly deposits of foreign banks with UAE banks.

From Dh310 billion at the end of 2007, the foreign liabilities surged to Dh332.7 billion at the end of March, the report showed. The foreign liabilities had grown rapidly over the past two years from around Dh178.6 billion at the end of 2006, a surge of nearly 86 per cent.

Bankers attributed the surge to a rush by foreign banks to place dirham deposits with local banks in anticipation of a UAE decision to revalue its currency against the US dollar following a sharp fall in the US currency. Such deposits have remained at their highest level this year despite weakening speculation about the appreciation of the dirham and other Gulf currencies that have been hurt by the rapid fall in the dollar value over the past year.

According to the Central Bank, quasi-money dirham deposits leaped from around Dh182.9 billion at the end of 2006 to Dh293 billion at the end of 2007 and as high as Dh305.4 billion at the end of the first quarter of this year.

In contrast, foreign currency deposits recorded slight change during that period, rising from Dh96.3 billion at the end of 2006 to Dh97 billion at the end of March.

The surge in quasi-money dirham deposits allied with a sharp growth in monetary deposits to largely boost broad money M2 from nearly Dh399 billion at the end of 2006 to Dh565.7 billion at the end of 2007 and a record Dh624.3 billion at the end

of March. Money supply M1 jumped from Dh120bn to nearly Dh181bn and Dh221bn in the same period.

The report showed the accumulation of deposits allowed UAE banks to sharply expand their lending activity to meet soaring domestic demand for credits triggered by an economic and construction boom in the region.

From Dh474.1 billion at the end of 2006, total credits by the UAE's 24 national banks and 27 foreign units jumped to Dh647.4 billion at the end of 2007 and a record Dh723.8 billion at the end of March, the Central Bank said. By the end of March, the private sector has had the lion's share of the credits, with claims on it peaking at Dh570.2 billion.

To cope with surging lending, UAE banks are pursuing a drive to expand their capital base in line with Central Bank instructions to avert a fresh loan crisis.

The combined capital and reserves of the 51 banks hit an all time high of Dh146.9bn at end-March compared with Dh132.4bn at the end of 2007 and around Dh105.6bn at the end of 2006.