UAE state entities up deposits in financial-sector liquidity boost

• Central bank targets stability amid war
• Government also borrows more
• Related bodies park extra AED51bn

The UAE state and government-related entities increased their deposits and borrowings at banks in the country in March, central bank data shows, as policymakers sought to boost financial-sector liquidity during the Iran war.

The conflict, which began on February 28, disrupted many industries across the Gulf including energy, tourism, hospitality and trade.

In mid-March, the UAE central bank launched what it described as a comprehensive package to “reinforce the stability and resilience” of the banking sector. Data published last week sheds light on broader efforts by state and emirate-level institutions to support the banking sector during the conflict.

Government deposits at banks in the UAE rose 9 percent, or AED35 billion ($9.5 billion), to AED427 billion in March compared with February. Government-related entities’ (GRE) deposits gained AED51 billion, or 16 percent, to AED363 billion over the same period.

Separately, money due to the central bank from UAE banks jumped to AED32 billion from less than AED1 billion previously, while it withdrew AED27 billion from accounts abroad and reduced its foreign investments by AED53 billion.

“There has been a lot of domestic replenishment of liquidity through the government and government institutions in particular,” said Azad Zangana, head of GCC macroeconomics at Oxford Economics in Dubai.

“That’s why the sovereign wealth funds were created – to diversify the wealth and ensure a good amount of it is liquid and can be brought home when required. The authorities want to ensure that banks are well capitalised and with lots of liquidity because they don’t want any kind of liquidity crisis. So, they’ve done that by repatriating money and putting it in the right places.”

Government and GRE deposits more than offset AED44 billion of withdrawals by private companies and individuals. Total bank-sector deposits grew by 1.4 percent to AED3.4 trillion.

Government and GRE borrowing rose by a combined AED35 billion, to AED580 billion. Corporate lending expanded nearly 2 percent to AED956 billion, but personal borrowing stayed unchanged at AED580 billion.

Overall UAE bank credit grew by 2.5 percent in March to AED2.1 trillion.

The increase in government and GRE borrowing and deposits represents both sides of the balance sheet, Zangana explained. Deposits are liabilities for banks, while loans are assets.

“When that borrowing happens, it’s normal for that money to sit in the borrower’s bank account initially,” he said.

The UAE’s M1 monetary supply, a narrow measure including currency and immediately withdrawable deposits, shrank 2.5 percent in March.

The monetary base – a highly liquid category known as M0 that includes currency in circulation and commercial banks’ reserves held at the central bank – fell 4.2 percent, according to AGBI calculations.

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“M0 has continued to fall, but it’s not declining anywhere near as fast as it was in the first few weeks of the Iran war – the central bank’s liquidity injection has helped stabilise the situation,” Zangana said.

UAE banks upped their equity investments by 8 percent, to AED27.6 billion in March.

The likes of the International Monetary Fund and the Bank for International Settlements “aren’t keen on banks investing in equities because it’s outside their core business model of taking deposits and re-lending this money to stable, secure borrowers, but perhaps UAE banks saw a value opportunity and are using their balance sheets to buy stocks”, Zangana said.