June 20, 2011 UAE's interbank rate drops to help economic growth
The rate at which banks in the United Arab Emirates lend to each other tumbled to the lowest level in more than four years, helping support a recovery in the second-biggest Arab economy.
The three-month Emirates interbank offered rate has dropped 25 percent, or 52.5 basis points, since the beginning of April, to 1.60625 percent, the lowest since Bloomberg began collecting data in September 2006. The rate reached 4.79 percent 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 Arabian Gulf country, home to about 7 percent of the world’s proven oil reserves, will probably accelerate to 4 percent this year from 2.2 percent last year, according to Citigroup Inc. Earlier this month, default risk on Dubai, the second largest of the seven emirates that make up the UAE, dropped to the lowest level since state-owned holding company Dubai World roiled global markets when it said it needed to restructure $25bn in debt.
The sheikhdom’s 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 Nov. 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 332 on June 17.
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 materialise. The dollar, to which the dirham is pegged, weakened 27 percent 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 percent since since the wave of anti-government protests in the Arab world reached Libya in February and the Persian 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 senior economist for the Middle East at HSBC Holdings , said.
Deposits rose for a third month, advancing 2.1 percent in April from March to 1.13 trillion dirhams ($310bn), according to data posted on the central bank’s web site June 8. Banks added AED78.7bn in deposits in the first four months of 2011 after AED67bn 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 $10.5bn 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.”
Property prices in Dubai, the second largest of the United Arab Emirates’s seven sheikhdoms, have dropped 64 percent from their peak in mid-2008, while rents have fallen 55 percent, Deutsche Bank AG said. House prices in the UAE. may drop an additional 25 percent to 30 percent as population growth stagnates and more properties are put onto the market, according to Dubai-based investment bank Rasmala.
UAE interest rates are about six times higher than the 3-month dollar Libor which was last at 0.2465 percent. The three-month interbank rate in Saudi Arabia, whose riyal is also pegged to the dollar, was at 0.65 percent, Kuwait’s at 0.8125 percent and Bahrain’s at 1.22 percent, according to data compiled by Bloomberg.
Investors are also differentiating between Dubai and the larger emirate of Abu Dhabi, which holds more than 90 percent of the country’s oil reserves. Default risk of Abu Dhabi was at 95, according to CMA.
The yield in Abu Dhabi’s 6.75 percent bond maturing in April 2019 declined three basis points this month to 3.87 percent June 17. The yield on Dubai’s 7.75 percent bond due in October 2020 rose one basis point, or 0.01 percentage point, to 6.95 percent.
The rate is still 182 basis points below the record 8.77 percent it reached on March 2. Bank lending in the UAE. is increasing, rising 2.2 percent in the four months through April after advancing 1.3 percent in 2010. The increase in bank deposits helped lower the industry’s loan-to-deposit ratio to 93.4 percent in April from 98.3 percent in December and from 108 percent at the end of 2008
“The decline in the Eibor will have some impact on the cost of lending, so there will some impact on lending growth,” Rasmala’s Madha said. “It’s a general positive for the economy.”
http://www.arabianbusiness.com/uae-s-interbank-rate-drops-help-economic-growth-406042.html
The rate at which banks in the United Arab Emirates lend to each other tumbled to the lowest level in more than four years, helping support a recovery in the second-biggest Arab economy.
The three-month Emirates interbank offered rate has dropped 25 percent, or 52.5 basis points, since the beginning of April, to 1.60625 percent, the lowest since Bloomberg began collecting data in September 2006. The rate reached 4.79 percent 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 Arabian Gulf country, home to about 7 percent of the world’s proven oil reserves, will probably accelerate to 4 percent this year from 2.2 percent last year, according to Citigroup Inc. Earlier this month, default risk on Dubai, the second largest of the seven emirates that make up the UAE, dropped to the lowest level since state-owned holding company Dubai World roiled global markets when it said it needed to restructure $25bn in debt.
The sheikhdom’s 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 Nov. 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 332 on June 17.
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 materialise. The dollar, to which the dirham is pegged, weakened 27 percent 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 percent since since the wave of anti-government protests in the Arab world reached Libya in February and the Persian 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 senior economist for the Middle East at HSBC Holdings , said.
Deposits rose for a third month, advancing 2.1 percent in April from March to 1.13 trillion dirhams ($310bn), according to data posted on the central bank’s web site June 8. Banks added AED78.7bn in deposits in the first four months of 2011 after AED67bn 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 $10.5bn 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.”
Property prices in Dubai, the second largest of the United Arab Emirates’s seven sheikhdoms, have dropped 64 percent from their peak in mid-2008, while rents have fallen 55 percent, Deutsche Bank AG said. House prices in the UAE. may drop an additional 25 percent to 30 percent as population growth stagnates and more properties are put onto the market, according to Dubai-based investment bank Rasmala.
UAE interest rates are about six times higher than the 3-month dollar Libor which was last at 0.2465 percent. The three-month interbank rate in Saudi Arabia, whose riyal is also pegged to the dollar, was at 0.65 percent, Kuwait’s at 0.8125 percent and Bahrain’s at 1.22 percent, according to data compiled by Bloomberg.
Investors are also differentiating between Dubai and the larger emirate of Abu Dhabi, which holds more than 90 percent of the country’s oil reserves. Default risk of Abu Dhabi was at 95, according to CMA.
The yield in Abu Dhabi’s 6.75 percent bond maturing in April 2019 declined three basis points this month to 3.87 percent June 17. The yield on Dubai’s 7.75 percent bond due in October 2020 rose one basis point, or 0.01 percentage point, to 6.95 percent.
The rate is still 182 basis points below the record 8.77 percent it reached on March 2. Bank lending in the UAE. is increasing, rising 2.2 percent in the four months through April after advancing 1.3 percent in 2010. The increase in bank deposits helped lower the industry’s loan-to-deposit ratio to 93.4 percent in April from 98.3 percent in December and from 108 percent at the end of 2008
“The decline in the Eibor will have some impact on the cost of lending, so there will some impact on lending growth,” Rasmala’s Madha said. “It’s a general positive for the economy.”
http://www.arabianbusiness.com/uae-s-interbank-rate-drops-help-economic-growth-406042.html
