Bank deposit drop fuels fears

Gulf states face the prospect of scaling back their growth plans if a slowdown in Europe and China combines to create a dip in world economic output, bankers and economists warn.

TDIC has withdrawn the tender for a construction contract for the Guggenheim museum, scale model above, on Saadiyat Island.
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UAE bank deposits dropped by almost Dh60 billion (US$16.35bn) in the third quarter, fuelling fears over the state of the economy.

Lending outstripped deposits for the first time in a year, pushing the loan-to-deposit ratio above 100 per cent. Deposits fell Dh11bn or 1 per cent last month compared with the previous month, Central Bank data showed. The contraction was the fourth in five months.

"Several factors are likely to have contributed to the decline in deposits last quarter, including debt payments by government-related entities, lower interest rates on deposits in the UAE, as well as a possible increase in remittances abroad over the summer," wrote Khatija Haque, a GCC economist at Emirates NBD. Loan growth picked up last month, increasing 1.7 per cent over the previous month. But the rise was not sufficient to stop the loan-to-deposit ratio creeping up to 101 per cent, giving banks a smaller capital cushion than earlier in the year.

The trend suggests the boost to deposits that banks received from the Arab Spring has gone into reverse, possibly leaving banks overextended, said analysts.

The new data comes amid warnings from bankers that Gulf states may be forced to scale back growth plans if a slowdown in Europe and China combines to cause a dip in global output. The souring outlook for the world economy may force a rethinking of priorities among Gulf states where government income is tied to demand for oil. "Decisions on which projects to undertake and how to spend will be made in terms of their profitability and impact," said Masood Ahmed, the director of the Middle East and Central Asia department at the IMF. "As the world economy changes, people revaluate."

Abu Dhabi has been quick to alter investment in some of its long-term development projects as the global outlook darkens. On Monday, Abu Dhabi's Tourism and Development Investment Company said it was delaying the tender for a construction contract for the Guggenheim museum, part of the emirate's plans to build a cultural centre on Saadiyat Island.

However, the UAE has pushed ahead with other key economic projects, awarding the contract for the first phase of the country's rail project on Wednesday.

While a dip in global growth was more likely than an outright recession, a downturn causing the price of oil to drop to $80 per barrel would bring problems for many Gulf states, said Jean-Michel Saliba, an economist at Bank of America Merrill Lynch. "There will be a threat and it'll be a reassessment of some projects," he said. "We've seen some of this already."

Mr Saliba said the most likely risk to the Middle East was a dip in growth in China, which the International Energy Agency ranks as the world's biggest consumer of oil.

Merrill Lynch yesterday lowered its estimate for China's GDP growth to 8.6 per cent next year from previous expectations of 9 per cent. But even in the event of weak global growth, there is little chance of a repeat of the crisis that occurred in 2009, when Nakheel was forced to halt debt repayments.

"The UAE is in a stronger position because a lot of the restructuring of the debt of the government-related entities has been done," said Mr Ahmed.

"There's still some more to be done, and next year the financial markets are in a bit more of a risk-averse situation, so that will be another area in which they need to focus."

Many key projects stand to lose large amounts of funding if the current turbulence in European markets prevails, said V Shankar, Standard Chartered's chief executive for Europe, Middle East and North Africa.

"There will be an impact," he said. "If you look at any large project over the last six or seven years, a large number of the participants are European banks."