UAE interbank rate drop to aid economic growth

DUBAI - The rate at which banks in the UAE lend to each other tumbled to the lowest level in more than four years, helping support a recovery in the second-biggest Arab economy.

By (Bloomberg)

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Published: Tue 21 Jun 2011, 11:40 PM

Last updated: Tue 7 Apr 2015, 4:51 AM

The three-month Emirates Interbank Offered Rate, or EIBOR, has dropped 25 per cent, or 53.4 basis points, since the beginning of April, to 1.5975 per cent on Monday, the lowest since Bloomberg began collecting data in September 2006. The rate reached 4.79 per cent in October 2008 after the collapse of Lehman Brother Holdings Inc triggered the worst economic slump since the 1930s Great Depression.

Cheaper borrowing costs will “induce people to increase consumption and investment spending,” Murad Ansari, an analyst at investment bank EFG-Hermes Holding SAE, said. ‘‘Mortgage rates have come off and in some cases banks might be more than willing to pass on lower funding costs to customers.’’

Economic growth in the Gulf country, home to about seven per cent of the world’s proven oil reserves, will probably accelerate to four per cent this year from 2.2 per cent last year, according to Citigroup Inc. Earlier this month, default risk on Dubai, dropped to the lowest level since state-owned holding company Dubai World roiled global markets when it said it needed to restructure $25 billion in debt.

The five-year credit default swaps fell to 317 basis points on June 7, according to data provider CMA, which is owned by CME Group Inc and compiles prices quoted by dealers in the privately negotiated market. They surged from 325 basis points on November 24, 2009 to 655 three days later after the Dubai World announcement. The contracts, which pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government fails to adhere to its debt agreements, were at 341 on Monday.

Bank deposit growth slumped in 2008 when the global credit crunch hit and foreign-investor bets that the UAE would revalue its currency failed to materialize. The dollar, to which the dirham is pegged, weakened 27 per cent between the end 2005 and the middle of 2008, leading to imported inflation.

That trend was reversed as oil prices rose as much as 35 per cent since since the wave of anti-government protests in the Arab world reached Libya in February and the Gulf states largely avoided the upheaval. “Dubai particularly has responded very well to its safe- haven status in comparison to other parts of the region and that may have brought risk aversion down here,” Liz Martins, a Dubai-based economist for the Middle East at HSBC Holdings Plc, said.

Deposits rose for a third month, advancing 2.1 per cent in April from March to Dh1.13 trillion ($310 billion), according to data posted on the central bank’s web site June 8. Banks added Dh78.7 billion in deposits in the first four months of 2011 after Dh67 billion in all of last year.

‘‘Deposits now exceed loans, and credit risk in Dubai has eased, with credit default swaps coming off their highs,’’ Philippe Dauba-Pantanacce, an economist for the Middle East at Standard Chartered Plc, said in an e-mail. The ‘‘market is pricing a 10 to 15 basis point decline in Eibor rates over the short term’’ in the absence of any unforeseen events, he said.

Dubai World in March reached an agreement with about 80 creditors and the government to alter the terms on the debt. Nakheel PJSC, the developer of the palm-shaped islands off Dubai’s coast, is close to reaching a deal with its banks and trade creditors to restructure about $10.5 billion of debt, while two units of Dubai Holding LLC have also agreed on new loan deals.

Interbank rates in the UAE are still higher than the US dollar London interbank offered rate. “We have only just signed on some restructuring contracts,” said Raj Madha, a Dubai-based analyst at Rasmala Investment Bank Ltd. “We still have a disastrous property market, with most analysts forecasting a decline in property prices as well as a decline in rents.”

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