UAE interest rates may go up in short term

In the short term, interest and profit rates for the banking sector are set to rise after the Central Bank of the UAE's intervention of hiking the interest rate applied to certificates of deposit by 25 basis points.
"The rate hike is expected to be at small increments of 25pbs possibly twice during 2016," says Alp Eke, a senior economist at National Bank of Abu Dhabi.
"Most of the customers are aware of possible future hikes and would prefer short term deposits, instead of long term."
Most of the market was prepared for the inevitable increase in the US Fed rate, the economist said. Emirates Interbank Offered Rate (Eibor) began moving upward starting from beginning of 2015. Eibor (3M) was at 0.68 per cent in January 2015, and moved up to 0.99 per cent as of December 17. Eibor (3M) reached a peak of 4.8 per cent in November 2008. In 2016, after two similar magnitude FED increases of 25pbs, Eibor is expected to move up and deposit rates will follow.
A banker told Khaleej Times there could be some drop in lending if interest rates go up as unsecured loans would be affected. Interest rate for unsecured loan ranges between 18 to 22 per cent a month. However, for secured loans, it ranges between 6.5 per cent to 8.5 per cent per month for an A category company. Interest rate on auto loan ranges between 2.5 per cent to 3.5 per cent per month.
Syed Hamayun Alam, general manager of Al Masaood Automobiles, who distributes Nissan, Infiniti and Renault cars in Abu Dhabi, ruled out any immediate increase in the interest rate on auto loans as the market is highly competitive. "Also people are sceptic in spending money and holding on to cash," he said. "If there is any increase it would be gradual," the general manager said. "It is not the right environment to increase interest rates."
The same views were echoed by Hamad Al Awadhi, vice-treasurer and board member of the Abu Dhabi Chamber of Commerce and Industry, who said that the private sector firms and SMEs are complaining of lack of funding, as risk-averse banks are looking to fund government and semi-government projects which are less risky. 
"The rise in interest rates can be absorbed by the buoyant UAE economy," with the announcement of Dh300 billion worth development projects in the coming five years.
Also, the projects which will be constructed in the coming two to three years have already achieved their financial closure, Al Awadhi said. The UAE economy is well diversified and resilient to external shocks such as oil price decline, said Eke. "Assuming the 2015 annual average for Brent is at $55 a barrel, the oil sector is expected to constitute 25 per cent of the UAE's nominal GDP. [Fifty per cent of GDP of Abu Dhabi and just 2.5 per cent of GDP for Dubai]. The UAE government has plans to reduce oil sector reliance even further," he said. Due to declining government revenues, government and government related enterprises or GREs have less currency available, he said as the government is an important source of deposits for UAE banking sector. Tightening liquidity is likely to increase the cost of borrowing and since banks are competing for deposits, the big companies are getting a very favorable high rates for deposits, and low rates for loans.
However, the cost of borrowing is increasing for SMEs, even though this sector constitutes 80 per cent of UAE non-oil economy. "Small businesses are under pressure because the economic slowdown has led to profit margin decline and most of the SMEs are struggling to pay back existing loans or are having difficulty securing loans," the economist said.
Economic slowdown due to declining oil prices, reduced government and GRE deposits have started impacting liquidity in the market. Loan-to-deposit ratio of UAE has recently passed the critical 100 per cent mark and liquidity is an issue. Profit levels of lenders are declining, the economist added. Increases in non-performing loan (NPL) rate are expected as the economy slows down and cost of borrowing increases. However, the central bank has already introduced regulations soon after the third quarter during the 2008 global crisis.
The banking system has multiple steps and controls. A credit bureau has been established and important borrower data has been accumulated. The UAE banking sector, especially the four market-leading banks - ENBD, NBAD, ADCB and FGB - have strong indicators and are resilient to the slowdown in the UAE economy.
- haseeb@khaleejtimes.com