World Economy

Easy Money Days End for (P)GCC States

Easy Money Days End for (P)GCC StatesEasy Money Days End for (P)GCC States

The days of very easy money are drawing to a close in the rich Persian Gulf Arab oil-exporting economies as money market rates start to rise, partly because of the damage which cheap oil is doing to government finances.

Loose liquidity created by inflows of oil money pushed short-term rates in Saudi Arabia, the United Arab Emirates and neighboring states to record lows last year, fuelling frenzied competition among banks to lend to firms at tiny spreads, Reuters reported.

But in the last few days, money rates have started to rise relatively sharply. If this continues, banks could begin to regain some pricing power over their loans.

One reason for higher rates is expectations for US monetary tightening this year. With their currencies pegged or closely linked to the US dollar, Persian Gulf Arab central banks would probably tighten too.

But a bigger factor is the plunge of oil prices since mid-2014, which has slashed governments' oil revenues, threatening to shrink flows of money into Persian Gulf Arab banks.

"The days of easy money are over," said a senior banker at a state-run UAE commercial bank, declining to be named because of the subject's sensitivity.

"Dragging oil prices and expectations that increased exports from Iran will add to the global supply glut are unnerving the money market, which previously held rates at rock-bottom levels for several months."

The UAE's three-month Emirates Interbank Offered Rate, at a record low 0.68% as recently as February, jumped 3 basis points in the past day to 0.79%, a 17-month high.

The three-month Saudi equivalent, essentially flat at a record low of 0.77% since March, climbed in the past few days to nearly 0.80%. Rates in Qatar, Kuwait and Bahrain also rose. The three states plus Saudi Arabia, the UAE and Oman are lumped together in the (Persian) Gulf Cooperation Council.

"In general, UAE banks' net interest margins tend to be positively geared to higher EIBOR rates, which have been on an upward trend year-to-date," said NBK Capital analyst Aarthi Chandrasekaran.

Many Persian Gulf companies have refinanced debt on cheaper terms over the past year; those that have not yet done so could find they risk missing the boat.


So far, bankers don't expect a squeeze that might cause money rates to soar.

The UAE banker said he believed that if the US Federal Reserve tightened 25 bps, EIBOR might rise roughly 50 bps. That would bring the three-month rate above 1%, to where it was in early 2013.

Finance ministries and central banks have been working with considerable success to protect banking systems from any drastic tightening. Several governments have huge financial reserves overseas; they have liquidated some of them and brought money home, keeping local markets flush with funds.

In the last few weeks, however, there have been signs this strategy has its limits. National Bank of Abu Dhabi said last week its deposits had shrunk 3.1% year-on-year because of lower government deposits.