UAE govt deposits lowest since late 2008

Government deposits held in United Arab Emirates' banks fell 13 per cent in the first two months of 2010 to their lowest level since late 2008, indicating policymakers are more comfortable with liquidity in the system now the worst of the financial crisis is over.

Gulf governments boosted their deposit levels at the height of the global financial crisis to help banks weather the downturn. Economic recovery has now reduced the need for them to keep money in banks although liquidity is still tight and credit growth is expected to be slow this year due to debt restructuring in Saudi Arabia and UAE-member Dubai. Government deposits at UAE banks fell to 179.4 billion dirhams ($48.86 billion) at the end of February, the lowest level since the third quarter of 2008, from 206.2 billion in December, central bank data showed.

"We have been seeing that net government deposits in the banking sector has been coming down since the second quarter of last year across the GCC (Gulf Cooperation Council)," said Monica Malik, chief economist at EFG-Hermes in Dubai.

"This is particularly as the central banks and the governments became more comfortable that liquidity in the banking sector was ample. However, it is important to note that the liquidity position is still tighter in the UAE banking system than in other GCC countries," she said.

The UAE government boosted deposits in banks to a peak of 220.9 billion dirhams at the end of 2008, from 149.9 billion at the end of the third quarter to help limit the impact of the crisis.

Overall bank deposits in the UAE, the world's third-largest oil exporter, stood at 958.3 billion dirhams at the end of February, down from 982.6 billion in December.

A senior finance ministry official said last month that UAE banks are strong enough to absorb any shock, even from restructuring of debt-laden Dubai World, and no capital injection was needed for now.

The UAE central bank has repeatedly said that banks, which are heavily exposed to state-owned conglomerate Dubai World, are more sound and liquid than a year ago.

Its governor was quoted as saying in a daily paper on Wednesday that liquidity and deposit volumes in the system are normal and compatible with the economy and its needs.

However, bankers have said liquidity was still tight in the system as lenders kept chasing deposits for longer-term funding, with offshore credit hard to access.

Analysts said the government withdrew deposits from banks to use them for investment programmes to support growth, which is seen lagging its Gulf peers this year.

"Their spending has increased ... in terms of trying to support the economy more and at the same time investing more into the hydrocarbon sector," said Reham ElDesoki, senior economist at Beltone Financial in Cairo.

"Of course the visibility is limited because there is a big lag in fiscal data for the UAE," she said.

Dubai World unveiled a better-than-expected $9.5 billion restructuring plan last month, which still needs to be cleared by creditors.

The UAE still has 20 billion dirhams left from a 70 billion dirham facility set up in 2008 to inject liquidity into the banking system.