The United Arab Emirates Central Bank launched a 50 billion dirham ($13.6 billion) emergency facility for banks on Monday, as a global liquidity squeeze hit financial sectors in the Gulf states. The central bank said it would set up a facility after interbank lending dried up, in moves similar to those made by major central banks including the Federal Reserve and European Central Bank. “Everyone needs money. There is a massive shortfall,” said Jason Goff, head of treasury sales at Emirates NBD. “These funds are going to help. They are definitely required.” Economies in the Gulf Arab states have expanded rapidly on a five-year surge in energy prices, sparking a real estate boom and creating the world's largest sovereign wealth funds, one provider of liquidity during the year-long credit crunch. But strong demand for lending and tensions from the credit crunch have dried up the interbank market in the UAE, experts say, with three-month lending rates jumping 170 basis points since early June to 3.61 percent on Monday. Liquidity has also been hit by the Gulf state's decision in April to keep the dirham pegged to the dollar, quashing market bets the currency could be revalued to fight inflation. “In the last two years, loan growth was faster than deposit growth and essentially what happened was there was greater demand among corporates and banks for external funds,” said Giyas Gokkent, head of research at National Bank of Abu Dhabi. “That has dried up because of the global volatility, and the projects are so large that any decline in funding sources creates a problem.” Banks had yet to be informed about what type of facility the central bank would introduce, bankers said. The central bank said last week that 90 percent of foreign speculative money had already flowed out of the country. Malcolm D'Souza, president of the UAE Financial Markets Association and head of treasury at National Bank of Ras Al-Khaimah, said the central bank could introduce a repurchase agreement to buy bonds held by banks in exchange for funds. It could also look at reducing the bank reserve requirement on demand deposits from 14 percent, he said. The central bank said its board had reviewed “additional resources available ... for providing further support to banks operating in the UAE if required”. Tensions in other major Gulf states were also high, with bankers and experts calling on central bankers to act. “We have our own credit crunch here,” said John Sfakianakis, chief economist at SABB bank, HSBC's Saudi subsidiary. “With the revaluation debate being over, banks have taken their money out, the deposit base is limited, high demand for loans, limitations on money that can be spent because of inflation and we are in a negative interest rate environment.” The treasurer of a Saudi bank, asking not to be named, said the Saudi Arabian Monetary Authority (SAMA) should consider similar moves. “Its efforts to tame inflation have brought financing almost to a standstill for small and medium projects. But we know that they can be extremely conservative and slow,” he said. Bankers in Kuwait said there was no talk of any move by the central bank to pump more liquidity into the banking system, despite a public plea by the Kuwaiti banking association. “Banks see a need for more liquidity since interbank rates are very high,” said a banker at a Kuwaiti lender, adding that a $4.5 billion capital increase by mobile operator Mobile Telecommunications had drained liquidity. The central bank “is basically telling the markets they won't let the liquidity situation deteriorate too much,” said Marios Maratheftis, head of research at Standard Chartered in Dubai. While the central bank wants to curb credit growth, it does not want it to freeze the economy and imperil growth, he said. “It's a Goldilocks story - they don't want it too hot, and not too cold either.” The three-month Emirates interbank offered rate, or Eibor, remained little changed on Monday at 3.61 percent, 161 basis points above the 2 per cent bench mark rate. The UAE pegs its currency to the dollar, obliging the central bank to follow the US Federal Reserve. The injection had not affected money market rates yet due to market inefficiencies, Maratheftis further said. However, AED50 billion is “quite significant”, at about 5.6 percent of the overall UAE credit market, so there is a risk it could prolong the lending activities of commercial banks and stoke inflation, he added. In the equity markets, Dubai's stock market dropped 2.5 per cent after rising nearly 10 percent on Monday, while Abu Dhabi's equity market gained 1.6 percent. The Omani central bank said after a board meeting that market liquidity was sufficient to meet the demands of different sectors, Al-Shabiba newspaper reported on Monday.
