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Right Measure at the Right Time

ABU DHABI — Abu Dhabi’s Dh16 billion cash injection to keep it banks liquid would ease pressure on the banking sector facing tight liquidity conditions, encouraging them to resume lending, says economists and financial analysts.

Dr. Shaikh Sultan bin Khalifa Al Nahyan, a member of Abu Dhabi Executive Council, had hinted last week that government will inject money in the banking system, to ease liquidity squeeze.

Khaleej Times spoke to economists and financial experts,who termed it as the right move at right time, which has made available a substantial amount for a longer period, at a very reasonable rate.

Now the larger banks domiciled in Dubai, would also seek similar funding to address their liquidity conditions.

Dr. Eckart Woertz, who is programme manager economics, at Gulf Research Centre said that the sum being pumped in is substantial. On whether the size of amount is appropriate or not to deal with the situation, he said it is difficult to quantify the need of the market in current volatile market conditions.

Dr. Woertz said that the backing of Abu Dhabi for its banks is certainly an important signal of confidence to the markets and may have the potential to ease lending procedures.

Asked if Dubai may follow the footsteps of Abu Dhabi in helping its banks, he said, “Dubai’s possibilities to manoeuvre are more limited than in the case of cash and oil rich Abu Dhabi. “But significant government support cannot be ruled out as the expansive budget has already shown,” he remarked.

Dr. Monica Malik, a senior economist at EFG-Hermes Investment bank called the money injection as a positive step, as there was a need for it, since nation’s banking sector has hard hit by liquidity crunch.

In September 2008, the Central Bank of the UAE set up a Dh50 billion window for banks to borrow money, though the allocated sum has still not been fully exhausted, due to high cost of borrowing.

The Ministry of Finance later pumped-in Dh70 billion, in two installments, according to the exposure of banks. The MoF still has to offer remaining amount of Dh20 billion, as third transche to banks and financial institutions, which is expected anytime.

Recently the Central Bank offered dollar-dirham swaps, which were welcomed by the cash-hungry banks, who obtained Dh3.7 billion in just one week of the launch of the window.

A leading economist speaking on the condition of anonymity said that the move will obviously strengthen capital adequacy of banks and put them in a far stronger position to lend.

He said that it should help with credit availability and possibly with credit cost; but cost of credit is also a function of what is happening system-wide across the UAE.

On more money injections in the future, the economist said it depends on what happens in the rest of the world in terms of external funding availability; also depends on the needs of the UAE banks — particularly Dubai banks — and how well their existing loan book performs. The economist was of the view that the move will help ease credit availability, but it does not automatically fix the fall in spending by households.

“The decline for instance in home purchases will not be fixed by this alone”, the economist said.

Raj Madha, a banking analyst at EFG-Hermes Investment Bank believed that the liquidity being made available should be appropriate for the medium-term, if things move smoothly and no massive shocks hit the economy.

The measure would also help in improving government owned banks’ sovereignty against perceived level of cost of counter-party risk.

On the six per cent fixed interest to be charged on the bonds, he said the subordinated debt carries a premium.

But, government should have differentiated between banking giants like National Bank of Abu Dhabi and smaller institutions, in dealing with them.

· haseebhaider@khaleejtimes.com