Speaking at the 51st ACI Financial Markets World Congress, Al Suwaidi said the banking industry across the world will be impacted by the stringent capital adequacy requirements under the Basel III and new international banking regulations.

“Globally banks will face a challenging environment in terms of availability of funds because of the new global regulations and the difficult economic conditions. Industrial activity and trading could face a shortage of funds. Fortunately, the UAE is doing well because of the strong trade and tourism sectors,” said Al Suwaidi.

Economists and analysts have recently cautioned that some Gulf economies could face funding gaps in the event of massive deleveraging and the consequent exit of European banks from funding in this region.

Although the economic reliance on European bank funding varies across the GCC, international rating agency Moody’s said in a recent report that a decrease in lending by European banks to the region could lead to a short-term liquidity squeeze and, more likely, a longer-term structural shortfall.

Likely new sources

In order to meet this gap, local GCC banks would need to grow as well as adjust their own funding structures. Going forward, the rating agency said, Asian banks and bond markets are likely to be two major sources of foreign funding.

European banks’ exit from the region has been driven by the ongoing euro area debt crisis and their need to deleverage and build up capital buffers to meet liquidity and capital adequacy requirements.

Overall, According to Moody’s, European bank lending to the GCC region amounted to around $237 billion (Dh870.34 billion) as of September 2011.

The rating agency expects the likely deleveraging to result in a sustained reduction of lending to the GCC at a time when the region faces sizable funding requirements, with an estimated $1.8 trillion of capital investments underway or planned over the next 15 years.

Moody’s assessment

Based on the vulnerability to the funding gaps, Moody’s has categorised the UAE and Qatar as economies that face moderate levels of vulnerability.

Analysts say the UAE credit growth is likely to remain under pressure this year as the debt restructuring of some government related entities (GREs) and high loans to deposit ratios are likely to limit the lending capacity of local banks.

“The loans to deposit ratios of UAE banks are close to 100 per cent while many UAE banks will be involved in the debt restructuring of some of the government-related entities, which could curtail their lending,” Shady Shaher, Standard Chartered’s economist for the Middle East and North Africa said recently.

Improved liquidity

UAE banks have materially improved their liquidity position since 2008 with liquid assets representing more than 23 per cent of total assets. With dependence on external funding viewed against the $50 billion of refinancing due in 2012-13, the UAE banks, particularly the Dubai-based banks are likely to go slow on lending.

“Despite the strong growth in customer deposits and sustained improvement in the loans to deposit ratio, lending is likely to remain muted in the UAE,” said Khalid F. Howladar, vice-president – senior credit officer, Financial Institutions Group, Moody’s Investors Services.

Al Suwaidi, however, said yesterday that the current rate of bank lending growth in the UAE is reasonable. “Bank lending is going at a reasonable rate. The rate has been close to 3.5 per cent, which is reasonable under the circumstances,” he told reporters yesterday.

Given the large amounts of foreign reserves held by the Central Bank (amounting to $40 billion as of September 2011) and substantial liquid assets held by the sovereign wealth funds, anlysts do not expect UAE banks to face any serious liquidity issue in the near term.

No decision yet on including yuan

The UAE has not made a decision to include the Chinese yuan in the UAE Central Bank’s official foreign currency reserves. Such a decision would be the result of a long-term process, Sultan Bin Nasser Al Suwaidi, UAE Central Bank Governor, told reporters in Dubai yesterday.

In January, the UAE signed a three-year currency swap agreement with China worth Dh20 billion ($5.45 billion) to boost two-way trade and investment.

Asked if the central bank had considered making the Chinese yuan a part of its official reserves, Al Suwaidi said: “This is a long-term issue and we are patient on such decisions.”

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