UAEs Credit Growth Strengthens On Government And Corporate Borrowings

Dubai: Gross credit growth in the UAE strengthened in January to 0.5 per cent month on month after contracting by 0.9 per cent in December, according to the UAE Central Bank data.

The monthly rise supported the year on year credit growth rate increasing to 2 per cent from 1.7 per cent in December. The government and corporate private sector were largely behind the acceleration in credit growth.

“We expect to see a gradual pickup in loan demand in 2018 with a strengthening in economic activity driven by the investment programme. We would need to see an ongoing trend developing in the data before confirming this, said Monica Malik, Chief Economist of Abu Dhabi Commercial Bank (ADCB).

January credit data continued to suggest deleveraging by government related entities segment, which saw gross loans fall by 1.1 per cent month on month after contracting by 6.4 per cent in December.

Data showed retail loan growth fell by 0.1 per cent in January, likely reflecting a softening in the consumer demand backdrop with the introduction of VAT.

The loan-to-deposit (L-to-D) ratio inched up in January to 97.9 per cent (December: 97.1 per cent) on the back of the monthly fall in deposits and increase in gross loans. Nevertheless, the L-to-D ratio continues to reflect the comfortable liquidity in the UAE banking system with the reading down from 101 per cent in June 2017.

“We see the ample domestic banking sector liquidity conditions also reflected in the marked narrowing in spreads between UAE and US interbank rates. Indeed, for some days at the end of February and in early March, Eibor traded at a discount to US Libor rate. We see the increase in US Libor and expectations of higher interest rates largely behind the rise in Eibor rates,” said Thirumalai Nagesh, an Economist at ADCB.

Repo rate

Analysts expect the US Fed to hike rates by 25 basis points (bps) to 1.75 per cent at its March meeting. The Central Bank of the UAE is expected to follow suit and increasing its repo rate (lending rate) by 25 bps to 2 per cent to maintain its 25 bps differential with the US rate.

System-wide deposits in the banking sector fell for a second consecutive month in January, contracting by 0.4 per cent month on month. Both resident (-0.4 per cent) and non-resident (-0.3 per cent) deposits saw a monthly drop with the government and private sectors behind the fall on the domestic side. Total deposits were still up 3.8 per cent year on year.

Combined net government and GRE deposits remained high with the rise in GRE net deposits partly compensating for the moderation in government net deposits.

Despite a small uptick in credit growth in January analysts expect that banks could be looking to reduce some excess liquidity with the overall weak credit demand backdrop.