The interest rate at which banks in the UAE lend to each other is hovering near an eight-year low, driven in part by flows of money into bank accounts, stocks and real estate from jittery investors in other emerging markets that see the country as an oasis of stability.
And as long as the country maintains its safe-haven status and the currency is pegged to the US dollar, the interbank rate, known as the Emirates Interbank Offered Rate, or Eibor, will probably continue to provide cheap funding for all those in need.
“Dubai gets a lot of capital flow coming in because it’s a haven from all kinds of instability,” said Simon Kitchen, a Cairo-based Middle East strategist at the Egyptian investment bank EFG-Hermes. “Since 2011 that’s been a haven from political instability, but more recently you’ve had wealthy people in China, India, Russia – big emerging markets. They are not happy about the economic and possibly political outlook at home, and so they are putting money into Dubai.”
Because the dirham is pegged to the US dollar, interest rates have been subdued ever since the United States Federal Reserve started to maintain record-low rates in the aftermath of the global financial crisis in 2008. The Fed has said it is unlikely to raise rates until next year.
The 12-month Eibor rate stands at 1.177 per cent. Since 2006, when records began, it has averaged 2.83 per cent, reaching a high of 5.52 per cent in 2007, according to Bloomberg.
Jaap Meijer, the head of research for financials at the Dubai-based Arqaam Capital, suggested that the Eibor rate has little room to fall further because it is now only 17 basis points above the UAE Central Bank’s overnight repo rate. “We do not expect any change to the official rates for the next 12 months or so, given the peg to the dollar,” he said.
Mr Meijer said the low Eibor rate reflected the strengthening of the banking sector, which has seen “lower non-performing loans, increased coverage ratios and improved liquidity facilities” over the past year. He also pointed to an improving loan-to-deposit ratio, now at 92.6 per cent compared to 94.7 per cent a year ago and 100 per cent three years ago, as a rationale for the declining Eibor.
Total bank deposits stood at Dh1.27 trillion in November, according to the latest Central Bank figures.
Low Eibor rates will continue to stimulate the UAE economy as companies take out loans to fund expansion and individuals increase real-estate purchases. At the same time, analysts warn that regulators will have to ensure that the country does not see a repeat of the debt crisis that it has begun to recover from.
“Economic activity has increased because of improved liquidity as reflected by the real estate, commodity and service sectors,” said Sangeet Jain, the assistant vice president for money markets at the Abu Dhabi-based asset manager Invest AD. “However, regulators are keeping a close eye on the economy and will be sensitive to any signs of overheating, and they will be quick to take preventive measures.”
The Eibor is set by a panel of 11 banks. Banks submit rates to the Central Bank, which removes the two highest and two lowest rates before calculating the average for a series of terms ranging from one week to one year.