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US dollar liquidity tightens in Gulf after downgrades

Reuters/Dubai
Filed on February 26, 2016 | Last updated on February 26, 2016 at 06.04 am
US dollar supplies are almost normal in the UAE.
US dollar supplies are almost normal in the UAE.

(Bloomberg)

The tightening of dollar liquidity, despite most countries' currency pegs to the dollar, which normally facilitate dollar supply by reducing exchange rate risk, shows persistent worries over the region's ability to cope with an era of low oil prices.


 US dollars are becoming more difficult and expensive to obtain in Gulf money markets since Standard & Poor's sharply downgraded the sovereign credit ratings of three of the region's oil exporters last week, bankers say.

The tightening of dollar liquidity, despite most countries' currency pegs to the dollar, which normally facilitate dollar supply by reducing exchange rate risk, shows persistent worries over the region's ability to cope with an era of low oil prices.

Some foreign banks that supply dollars to the Gulf have cut back their credit lines to reduce risk. The result could be higher costs for banks and companies doing international business in the region.

"Liquidity in the local currency is not a problem at all. It is growing. In customer deposits, it's ample in Bahraini dinars," Abdulkarim Bucheery, chief executive of Bahraini bank BBK, told Reuters this week.

"Liquidity in foreign currency, in USD, is shrinking. And especially with the downgrade of the country, some internationals may find it timely to cut lines. If that happens, I'm sure liquidity will be under question."

The dollar squeeze in the Gulf is not so far as serious as it was for a few months during the global financial crisis in 2008, but it is significant, especially for smaller banks in the region, bankers said.

US dollar supplies appear most seriously affected in Bahrain and Oman, affected to some degree in Saudi Arabia, and almost normal in the UAE, which with its diversified economy and huge foreign assets is widely believed to be able to handle cheap oil more comfortably than its neighbours.

In early January, it cost 0.3857 Omani rials to buy a dollar for delivery in 12 months' time; that price is now 0.4000, said a Gulf banker involved in quoting rates. The rate for Bahraini dinars has risen to 0.3830 now from 0.3807 in January. Banks can face different rates depending on their size and the scope of deals.

Until the last few months, worries about tightening liquidity in the six Gulf Cooperation Council nations focused on local currency money markets, as low oil prices slashed governments' revenues and reduced new deposits of state funds in banks. This pushed up short-term interbank lending rates.

Additional factors are now constraining access to dollars. One factor is the enforcement of US regulations designed to crack down on tax avoidance and anti-money laundering rules. 

 





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