Moves by Riyadh and Abu Dhabi to deposit $24bn with local banks in a bid to cut soaring interbank lending rates should be more effective than previous measures, bankers and economists in the region tell MEED.
The UAE’s Finance Ministry is distributing AED70bn ($19bn) among domestic banks, with the amount being deposited at each bank based on the size of its assets.
The Saudi Arabian Monetary Authority (Sama), the central bank, has deposited $5bn, with half the money in Saudi riyals, into its banks on a similar basis.
“The funds are being distributed according to the size of the bank to help bring down the Saudi interbank offered rate [Sibor], and to replace some of the dollars that left the region after the revaluation debate,” says John Sfakianakis, chief economist at Sabb, a Riyadh-based bank.
The moves mark a change of strategy by financial authorities after banks largely ignored previous attempts to establish a liquidity fund.
“The first attempts from regional central banks to respond to the crisis were definitely the wrong approach, but now they seem to be getting on the right track,” says one Dubai-based banker.
The UAE established a AED50bn ($13.6bn) fund on 22 September to help banks struggling with liquidity. The central bank has not said whether any institutions have made use of the funds, but no banks are known to have done so. “The fact that no one used this facility is a signal that liquidity is not the problem, it is one of funding,” says Mohamed Jaber, economist at Morgan Stanley.
The lack of central bank transparency on the issue has added to the market uncertainty.
“Transparency at this point is very important, so the central bank should be clear about whether this fund has been accessed,” says Jaber.
The new scheme to deposit money with local banks is an attempt to address the funding gap, which has been widening because of a mismatch between the boom in loans and slower growth in customer deposits.
“Credit growth in the region was 49 per cent in June,” says Marios Maratheftis, regional head of research at Standard Chartered Bank. “This number is scary. Deposit growth cannot keep up.”
Bankers say the new policy should prove more effective.
“Attracting deposits is the most difficult thing in an environment where real interest rates are negative,” says a senior manager at one UAE-based bank. “By putting money on deposit, the government will see a much quicker response to its actions because it is money that can be put to work right away.”
The moves appear to have had an immediate effect. On 21 October, the second day of Sama’s intervention, the three-month Sibor rate fell from 4.6512 per cent to 4.6375 per cent. This is still far higher than the 2.3 per cent rate in April.
A day later, the Emirates interbank offered rate (Eibor] fell even further to 4.59375 per cent, from 4.64 per cent the previous day, although that is still more than double the 2 per cent rate in June.
It remains unclear whether the size of the funds deposited will be enough to have a dramatic impact on interbank lending rates, or whether more will be needed.
“International banks have pulled out of the crossborder market, so any new funds need to be large enough to replace them,” says Raj Madha, banking analyst at Egyptian investment bank EFG-Hermes. “Getting that right can be quite difficult.”