- Bank liquidity tightening as revenue from oil in region slumps
- Most Arab Gulf countries have pegged currencies to U.S. dollar
National Bank of Abu Dhabi PJSC, the United Arab Emirates’ largest bank, said there’s a reduced supply of dollars in the country as the region grapples with the impact of oil trading around $30 per barrel.
“There is a dollar shortage,” Chief Executive Officer Alex Thursby told reporters in Abu Dhabi on Wednesday. “It’s not a crisis, but it is tightening,” he said. Government deposits in the U.A.E. slumped by more than $13 billion in a year after the drop in crude prices, the executive said on an earnings conference call in October.
Banks in the U.A.E., holder of the world’s sixth-largest oil reserves, are facing deteriorating conditions as lower crude leads to a decline in government spending, slower economic growth and falling asset quality, according to Standard & Poor’s. Liquidity at banks is tightening as revenue from energy resources sink.
The U.A.E.’s banking sector lost 56 billion dirhams ($15.25 billion) in government deposits since September 2014, of which NBAD’s share was 48 billion dirhams, Thursby said in October.
"Lower oil proceeds has led to an important drop in government bank deposits," said Philippe Dauba-Pantanacce, an emerging market economist at Standard Chartered Plc in London. "Loan-to-deposit ratios have broken 100 percent and the EIBOR has tightened – a sign of liquidity stress," he said, referring to the Emirates Interbank Offered Rate.
Most countries in the oil-rich Gulf Cooperation Council, which also include Saudi Arabia and Qatar, peg their currencies to the U.S. dollar, reducing exchange rate risk. The drop in oil prices has also boosted speculation that countries in the region will be pushed to adjust their currencies’ fixed exchange rates to the dollar.
Twelve-month forward contracts for the U.A.E. dirham, used partly to bet on a devaluation of the currency, climbed to 325 points in January, their highest since 2009. In Qatar, bank liquidity tightened further in January as lending rose and customer deposits declined in the world’s biggest exporter of liquefied natural gas.
"The problem is that liquidity tightening is happening across many markets and so finding new funding sources becomes more challenging and could push banks to return to price wars on deposit remunerations," Dauba-Pantanacce said.