The UAE banking system could face up to 12 months of constrained liquidity as banks struggle to grow their deposits, according to regional analysts.

The latest figures released by the Central Bank of the UAE on 6 December show that deposits in the UAE banking system fell in October for the fourth consecutive month, putting them now at their lowest level since January.

“We are seeing a tightening in liquidity conditions in the UAE banking system that could go for the next 12 months,” says Giyas Gokkent, chief economist at National Bank of Abu Dhabi (NBAD).

The decline in the volume of deposits puts the sector-wide loan-to-deposit rate at 101 per cent, meaning banks will be increasingly wary of booking new deals. More recent figures for the Emirates interbank offered rate (Eibor) also indicates that liquidity is constrained. The three-month Eibor rate on the 6 December was 1.51 per cent. Four months ago, the rate was 1.48 per cent after dropping from 2.14 per cent at the beginning of the year. Although the increase does not sound large, it is an indication that liquidity conditions in the UAE have stopped improving and are starting to get worse.

“These liquidity conditions are not conducive to more rapid economic growth,” says Gokkent. The UAE economy is expected to growth by 3.3 per cent in 2011 and 3.8 per cent in 2012, according to the IMF’s October forecast.

Tighter liquidity and rising interbank rates will mean that local corporate will find it more difficult, and more expensive, to borrow money. That could impact economic growth in the country’s non-oil sector. With oil prices over $100 a barrel for the majority of 2011, the UAE’s overall fiscal position will be strong, but one local analyst says, “The private sector will continue to be subdued if the situation in the banking market remains tough.”

Third-quarter results from UAE banks also indicates an increasing divergence between the fortunes of Abu Dhabi and Dubai banks. Between June and September, the UAE banking system deposits dropped by AED58.7bn ($15.9bn). In the same period deposits at Emirates NBD, the UAE’s largest bank by assets, dropped by AED17bn or nearly 30 per cent of the overall decline in deposits. At NBAD, the largest bank in Abu Dhabi, deposits fell by around AED5bn.

Gokkent adds that loan growth in Abu Dhabi banks is being supported by the Abu Dhabi 2030 development masterplan, which has enabled banks in the emirate to report average loan growth of around 6.5 per cent, compared to around 3 per cent for the whole country.