Bank loans to the private sector fell by almost 2 per cent between January and March, suggesting that the global credit crunch is still affecting the UAE's lenders despite government efforts to prop up the banking system. Outstanding loans to the private sector fell from Dh635 billion (US$173.12bn) in January to Dh623bn in March, the Central Bank said yesterday in its first-quarter statistical bulletin.
Private sector deposits at local banks also dropped, by about 6 per cent during the three months, from Dh336bn to Dh316bn. "Those lending numbers for me are consistent with weak private consumption and much slower capital spending," said Simon Williams, the chief economist at HSBC Middle East in Dubai. The Central Bank and other government departments have taken a variety of measures to counteract the financial crisis since it spread into the UAE last year.
Last September, the Central Bank made Dh50bn available for banks to support lending. The Ministry of Finance in October announced a programme in which it would deposit Dh70bn in local banks to stimulate lending. The UAE's repo rate, or the interest rate at which banks can borrow money from the Central Bank, has also been cut sharply during the past year, allowing banks to access lending money more cheaply than before. The key overnight repo rate was slashed from 4.25 per cent in January last year to 1 per cent in January this year.
These measures may not yet have brought private sector lending back to pre-crisis levels, the Central Bank's first-quarter figures suggest. At the same time, economists say that a quick recovery could hardly have been expected, given the difficulty regional banks are having in tapping international credit markets. Borrowers, too, tend to consume less and scale back on purchases of everything from construction machinery to factories during recessions, all of which they would have financed through banks in better economic times. That leaves banks with fewer opportunities to lend, even if they are able to do so.
Mr Williams called the Government's stimulus measures "correct" and "of great importance in maintaining stability", but said he still expected the weakness in private sector loan growth to extend into the second quarter. "The Central Bank measures have been effective in maintaining order, and I think the performance would have been significantly worse but for the action they have taken," Mr Williams said. "But it's going to take time for us to get back to the buoyant credit environment we enjoyed previously."
While loans to the private sector declined, the Central Bank statistics revealed that loans to the Government and other public sector entities increased from Dh70bn at the end of last year to Dh80bn at the end of March. The figures also showed a decline in credit extended to local firms in the construction, trade and financial industries. Credit to the construction sector fell by 8.7 per cent to Dh108.9bn from the end of last year to March. Credit to firms engaged in trade fell 6.4 per cent to Dh116.2bn in the period, and credit to financial firms - excluding banks - fell 7.2 per cent to Dh67.5bn.
Overall bank deposits and assets rose during the first quarter, with deposits rising from Dh912bn to Dh947bn, but the employee head count at local banks dropped by 838 between the end of last year and the end of March, to 38,751. afitch@thenational.ae