The UAE Central Bank’s decision to let lenders borrow in dollars against certificates of deposit (CDs) has sent a clear message to the markets that the dirham revaluation will not take place any time soon, say analysts and bankers.
The Central Bank said the facility was being granted to banks to meet foreign currency requirements. Banks can borrow up to $200 million (Dh734 million) per day per bank for three months or until the maturity of their dirham CDs, whichever is shorter.
“The decision will help reduce arbitrage and speculation on the dirham,” said a senior banker.
“There is a strong parallel market of trading on the dirham due to expectations of a revaluation.
“Dollar deposits fell to very low levels at all banks. The Central Bank’s move will help control this situation, at least for now.”
He said postponing the revaluation would fuel inflation.
“There is pressure on the dirham. Its purchasing value is depleting because of the low dollar and rising prices of oil and basic commodities in international markets,” he added.
Ezzeldin Al Masri, Senior Vice-President of Union National Bank, said: “The sub-prime crisis is affecting banks’ borrowing abilities. Most banks suffer from a shortage of liquidity because they have financed large long-term investments in the property market over the past two years. The Central Bank facility was to help banks gain liquidity.”
Ziad Dabbas, financial consultant at National Bank of Abu Dhabi, said most investors shifted deposits from the dollar to the dirham to benefit from the predicted revaluation.
“Interest rates on dirham deposits fell to less than the rates for dollar deposits. Investors preferred to keep capital in dirhams, expecting a revaluation would give them large profits on their investments.”
Hani Seif, investment analyst at Damac Securities, agreed.
“The process to depeg should proceed in two stages. The first would be a dirham appreciation of three to five per cent to control inflation. The Central Bank should then study the impact for at least six months.”
Sherif Sanad, head of trading at GFS Investments, said: “The dollar dragged the dirham to a very low level compared with other currencies, especially the Indian rupee and other Arab currencies. Indians working in the UAE are losing 25 per cent of their savings because of the drop. This increased pressure for a dirham revaluation to control the rising inflation.
“However, a dirham revaluation now would harm the economy as the dollar has fallen to very low levels. Also there are expectations that the dollar will reverse direction by the beginning of 2009.
“Saudi Arabia has said it would not take any decision about a riyal revaluation or depeg until the end of 2009. We expect the dollar’s value will have stabilised by then and the UAE Central Bank can decide its next step.”
No revaluation for now