Crude Oil Money Dries Up, UAE Money Rates Mark 2 Highs
$OIL
As governments’ Crude Oil income declines, they are making fewer deposits in their banking systems, reducing banks’ supplies of excess cash
Money market rates in the United Arab Emirates (UAE) hit their highest levels in roughly 2 years last Tuesday as low Crude Oil prices slashed state Oil revenues, leaving banks with less money to lend.
The economies of the rich Gulf Arab Crude Oil exporters have so far coped well with the plunge in prices since last year. Heavy government spending and strong activity in sectors other than energy have kept economies growing solidly.
But a rise in the UAE’s short-term market interest rates over recent weeks is a threat.
As governments’ Crude Oil income shrinks, they are making fewer new deposits in their banking systems, reducing banks’ supplies of excess cash. This is forcing up the cost of money and could eventually hurt economies by making loans to corporations and stock market investors scarcer and more expensive.
One-year money was offered at 1.180% among UAE banks last Tuesday, up from 1.157% at the end of last month and 1.081% at the end of June. The rate was at its highest since January 2014.
The overnight interbank rate, which hovered around 0.10% for the 1st 8 months of Y 2015, shot up to 0.46% last week before easing back to 0.38% on Tuesday.
A UAE money trader said the prospect of going without lavish deposits of oil money for the first time in several years was worrying some banks. “Banking system risk perception has changed, hence smaller banks have started quoting higher fixing rates. This is de facto monetary tightening,” he said.
Total deposits at banks rose only 0.7% between the end of Y 2014 and August, while domestic bank lending increased 5.7%, the latest central bank data shows.
So far, rising deposits by non-residents have partially offset falling government deposits and sluggish growth in residents’ deposits. Liquidity could tighten further if capital leaves the UAE in response to any slowdown of the economy and markets consultants JLL said..
Reflecting this possibility, the UAE Dirham is under pressure in the forwards market; 1-yr USD/Dirham forwards rose as high as 120 pts last Tuesday, their highest mark since December 2009.
So far the UAE central bank has not made a public statement about the tightening of liquidity, and it declined to comment.
However, the CEO at a UAE-based bank said the central bank had discussed the situation with commercial lenders in September. “The central bank is watching the liquidity situation, especially the impact on small banks, and may step in when needed,” he said.
With assets in its sovereign wealth funds estimated at near $1-T, the UAE has plenty of money that it could bring home if necessary to ease any liquidity crunch.
But with the US Fed’s talk about policy, it may be difficult for the UAE central bank to wrestle local market rates back down, even if it decides to do so.
The Dirham’s peg to the USD means the UAE has little room to conduct an independent monetary policy. Rate hikes in the United States would probably have to be imitated in the UAE to avoid capital outflows, according to a local banker familiar with the central bank’s thinking.
Have a terrific weekend
Paul Ebeling
HeffX-LTN
The post Crude Oil Money Dries Up, UAE Money Rates Mark 2 Highs appeared first on Live Trading News.