Official lending rates have dropped to their lowest in four months in a sign that the cost of borrowing for cash-strapped companies is likely to fall.
A decline in the benchmark interest rate is an indication that last week's Dubai bond sale is helping to loosen the flow of much-needed liquidity in the economy.
"It's symptomatic of better liquidity in the market," said Mark McFarland, the emerging markets economist for Emirates NBD. "The way Eibor [Emirates interbank borrowing offered rate] has already reduced suggests rates should come down for UAE companies."
Companies that have struggled to stay afloat during the global financial crisis are likely to be hugely relieved by any improvement in lending conditions. Businesses have been complaining about the ability to access cheap finance as banks tightened lending requirements to help cleanse their balance sheets.
The three-month Eibor slid to 2.3 per cent yesterday, the lowest level since May 24, Central Bank data show. Eibor had stood at 2.3375 last Tuesday, the day before Dubai successfully issued a US$1.25 billion (Dh4.59bn) sovereign bond.
Also last Wednesday, Emaar Properties said it would sell a $450 million convertible bond. The bond sales were widely viewed as a vote of confidence in the prospects for the economy by international investors. Uncertainty about Dubai World's debt restructuring and a general reluctance on the part of banks to lend to certain sectors of the economy had been blamed on Eibor's rise earlier this year.
The announcement last month of a near unanimous agreement to Dubai World's $24.9bn restructuring deal has also helped with the reversal of Eibor's advance.
But a drop in Eibor may not necessarily translate into an immediate fall in borrowing costs. Banks have frequently complained Eibor does not fairly reflect the cost of securing funding. Banks were expected to increasingly move towards using their own internally set base rate to determine the cost of loans.
In addition, banks' willingness to lend has remained constrained by a focus on bringing loan-to-deposit ratios down below 100 per cent after a build-up of non-performing loans linked to the financial downturn.
Liquidity in the financial system remains tight. M2 money supply, which includes term and savings deposits, dropped by 3.6 per cent in August, compared with 5.2 per cent in July, according to data from the Central Bank. Foreign banks with a strong presence in the country could help to begin lending to private businesses first, said Tudor Allin-Khan, the chief economist at HC Brokerage.
"The foreign banks which have a strong relationship in the UAE could kick-start lending," Mr Allin-Khan said. "But even then it will be the larger corporates who we expect to benefit first."
tarnold@thenational.ae
