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Slow UAE credit growth set to linger on in 2018

Dubai: Slow credit growth driven by weak credit demand in UAE in 2017 is expected linger on this year, economists and analysts have said.

UAE Central Bank Data on credit growth released in December showed weak credit demand in 2017. Gross loans fell 0.9 per cent month-on-month in December, resulting in an annual growth of just 1.7 per cent.

“The monthly fall in total loans in December appears to be a seasonal effect, with similar trends seen in the previous three years. Lower GRE [government-related entities] borrowing [-6.4 per cent] month-on-month was largely behind the overall drop in December 2017, suggesting a notable repayment of debt,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank (ADCB).

Overall data continues to highlight the weak credit demand environment in 2017, with loan growth decelerating from 6 per cent at end 2016.

“We see a number of factors driving this, including: i) a higher oil price supporting government revenue; ii) ongoing restructuring and still cautious spending plans by corporates [private and GRE-related]; and (iii) soft consumer sentiment with continuing labour market weakness,” said Malik.

Gross GRE loans were down 7 per cent year-on-year in December 2017, implying deleveraging in the sector, after expanding by 9.3 per cent in 2016, and the driving of credit growth. Other forms of funding, including the bond market and international export credit agencies, are also being utilised to support the UAE’s investment programme.

The UAE Central Bank’s credit sentiment survey from the December 2017 quarter showed a marginal increase in business loans, mainly attributable to the strengthening in demand in Dubai. On the other hand, demand for personal loans in aggregate was flat, with most respondents reporting no change.

In terms of outlook, demand for both personal and business lending was expected to increase only on modest scales.

Deposits and liquidity

Central Bank data shows system-wide deposits rose by 4.1 per cent in 2017. Total banking sector deposits fell by 0.3 per cent month-on-month in December, led by a 14 per cent (Dh34.6 billion) drop in government deposits, though this was after solid increases over the previous few months.

On a yearly basis, total deposits were up 4.1 per cent year-on-year, substantially above the pace of credit expansion.

The main drivers of deposit growth in 2017 were the government sector (up 13.5 per cent ) and GREs (up 14 per cent). Private sector deposits rose by a more contained 2.1 per cent.

Consequently, net government and GRE deposits in the banking system rose markedly in 2017, also supported by deleveraging by GREs.

Non-resident deposits fell 3.7 per cent year-on-year in December, resulting in their share of total banking sector deposits moderating to 11.8 per cent, down from 12.7 per cent at the end of 2016.

Overall liquidity in the banking system is expected to remain comfortable in 2018.

The gross loan-to-deposit (L-to-D) ratio moderated to 97.1 per cent in December, down from 99.4 per cent at the end of 2016, with deposit growth outpacing credit growth.

The easing of banking sector liquidity conditions is also reflected in the narrowing in spreads between UAE and US interbank rates.

“We expect liquidity to remain comfortable in 2018 on the back of a higher oil price, further international debt issuance and a contained acceleration in credit growth. We see further traction building in the UAE’s investment programme in 2018, which should support a gradual pick-up in credit growth, though potential headwinds remain,” said Thirumalai Nagesh, an economist with ADCB.

With the consumption backdrop is expected to remain soft in 2017, especially in the first half of this year with the introduction of VAT, analysts expect retail demand for credit to slow down.

“The government’s borrowing requirements could moderate as a result of higher oil and non-oil [including VAT] revenue. Indeed, we see the UAE realising a balanced fiscal position in 2018 with higher government revenue despite a pick-up in government spending,” Malik said.

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