Non-oil economy cools in Emirates on reluctant bank lending

The UAE's non-oil economy cooled in June as the banking sector remained reluctant to lend to local businesses and order books grew at a pace faster than companies could keep up with.

The HSBC Purchasing Manager's Index (PMI) for the UAE fell to 53.2 last month, a three-month low for the measure, signalling a decreased rate of growth among the Emirates' private sector.

A PMI reading of more than 50 signals expansion; below 50 signals contraction.

The economy was in good health, but a lack of capacity was leading to growing backlogs for the UAE's private sector, said Simon Williams, the chief economist for the Middle East and North Africa at HSBC.

"I suspect there are further declines to come, but the positive new orders numbers suggest that the economy is managing to maintain some momentum despite the weak global backdrop and falling energy prices."

But the slowing pace of expansion comes as new lending to UAE companies and individuals slowed slightly. Lending grew by just 0.2 per cent during May to a total of Dh1.074 trillion (US$291 billion), according to the latest data from the Central Bank.

Liquidity tightened during the month, with deposits falling 1.2 per cent to Dh1.125tn.

During the first five months of the year, total bank lending has increased just 0.3 per cent.

A combination of more stringent regulation and the effects of European banks withdrawing funds from the Middle East was likely to prolong tighter liquidity conditions among UAE banks, analysts from Deutsche Bank wrote in a research note.

"We believe this scenario is unlikely to improve in the short to medium term given ongoing deleveraging in the corporate sector, tighter regulations regarding retail and corporate/sovereign exposures, and the risk that liquidity could tighten," the report said, adding that about a fifth of banking system assets are funded from overseas.

Of particular concern is a new Central Bank regulation that caps the amount of exposure to single borrowers at 100 per cent of regulatory capital. Lenders have until September 30 to comply.

The rule is intended to reduce local lenders' vulnerability to a large corporate default and prevent a repeat of the chaos caused by the 2009 default by Dubai World.

Emirates NBD and National Bank of Abu Dhabi are currently in breach of the new limits, analysts from Deutsche Bank added.

Despite the dip in the PMI data, the report showed signs that the UAE was being supported by neighbouring countries.

"The acceleration in new export orders suggests that the UAE's private sector is benefiting from strong growth elsewhere in the Gulf region," analysts from Capital Economics wrote in a research report.

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