After remaining stubbornly high over the past two years, interest rates in the UAE are finally beginning to come down and the lower cost of borrowing should ultimately contribute to strengthening growth in the economy.
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The financial system has notably received substantial inflows of liquidity in the first part of this year, which have served to push interest rates and credit spreads down.
One of the most visible signs of this has been the easing in Emirates interbank offered rates (Eibor), which serve as an important benchmark for pricing many corporate loans, funding operations and other borrowings.
The three-month Eibor began to head lower early last month. After remaining largely unchanged since October at about 2.13 per cent, it finished last month below 2 per cent.
Many observers follow the spread between Eibor and US dollar London interbank offered rates (Libor) as a gauge of local money market conditions.
Since the dirham is pegged to the dollar, economic theory says the interest rates for these two countries should be linked as well, with any difference representing idiosyncratic local market conditions.
Thus the difference between Eibor and US dollar Libor can be seen as a measure of the liquidity/credit premium in the local interbank market compared with the dollar funding market in the US.
The spread between these two benchmark rates in the three-month tenor has fallen from 185 basis points earlier in the year to less than 170 points in the early part of this month, and has plenty of room to fall further.
It is useful to examine the broader monetary backdrop. Increased liquidity in the banking system has been the primary driver of changing conditions, with strong growth in bank deposits.
Central Bank data show deposits rose by 14.3 per cent to Dh1.1 trillion (US$300.85bn) in March compared with March last year. Deposits were up 5.3 per cent in the first three months of the year alone.
This has helped to push banks' loan-to-deposit (LTD) ratios lower. The ratio for the banking sector as a whole fell below 100 per cent in October for the first time since 2007, meeting the target threshold set by the Central Bank.
Continued improvement in this measure over the following months has helped to restore confidence in the development of a sustainable trend, and the LTD ratio fell further in March to 94.8 per cent.
As the supply of deposit funding demonstrated sustained gains, this put downward pressure on the market price for deposits (that is, interest rates paid), and banks began lowering rates they pay on deposits from the early part of this year.
By mid-March, the lower rates gave investors incentive to look elsewhere to generate higher yields. About the same time consensus built regional political unrest had stabilised. These conditions created demand for local bonds. Ample liquidity from local investors, improving liquidity ratios in banks and a rally in local credit all set the stage for the drop in Eibor last month. Continued pressure from these factors should sustain the downward momentum in interbank rates over the coming months.
At the same time, the supply of funds available and an improving economic backdrop should spur businesses to raise funds in the local market to finance expansion.
So far this year, there have been three large bond issues in the UAE.
Emaar raised $500 million in a sukuk sale announced in January. The International Petroleum Investment Company successfully sold €2.5bn (Dh12.97bn) and £550m (Dh3.27bn) during challenging market conditions in early March, and Mubadala Development, a strategic investment company owned by the Abu Dhabi Government, sold $1.5bn last month.
Conditions appear optimal for further issuances, with credit spreads much tighter than a couple of months ago and US dollar interest rates near their lows for the year.
Despite rising liquidity and an increase in money supply, growth in bank loans and advances has been slow and has remained subdued since in late 2008. After some signs of a gradual pickup in bank credit last year, loan growth stagnated towards the end of it.
There have been green shoots in the first couple of months of this year, although loans were still up only 2.5 per cent in March compared with March last year.
But continued downward pressure on Eibor should eventually feed into stronger credit growth. At a sector level, a few areas have recently demonstrated growth.
Increases in credit to heavy industry and personal loans for business purposes have shown signs of nascent growth, according to recent data from the Central Bank.
The latter augurs well for optimism among small and medium-sized businesses, an important engine of economic growth. In short, recent moves in Eibor and bond yields are a reflection of opportunities to earn relatively high rates of return in local fixed income markets.
The scope for further falls in rates should reveal itself in greater opportunities for companies to raise money more cheaply, and for these benefits to filter through to consumers and businesses.
Tim Fox is the head of research and chief economist at the global markets and treasury division of Emirates NBD, but is writing here in a personal capacity
Leap of Faith
Michael J Mazarr
Public Affairs
Dh67
Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
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Sarfraz (c), Zaman, Imam, Masood, Azam, Malik, Asif, Sohail, Shadab, Nawaz, Ashraf, Hasan, Amir, Junaid, Shinwari and Afridi
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MATCH INFO
Manchester City 1 (Gundogan 56')
Shakhtar Donetsk 1 (Solomon 69')
Short-term let permits explained
Homeowners and tenants are allowed to list their properties for rental by registering through the Dubai Tourism website to obtain a permit.
Tenants also require a letter of no objection from their landlord before being allowed to list the property.
There is a cost of Dh1,590 before starting the process, with an additional licence fee of Dh300 per bedroom being rented in your home for the duration of the rental, which ranges from three months to a year.
Anyone hoping to list a property for rental must also provide a copy of their title deeds and Ejari, as well as their Emirates ID.
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The specs
Engine: 6.2-litre supercharged V8
Power: 712hp at 6,100rpm
Torque: 881Nm at 4,800rpm
Transmission: 8-speed auto
Fuel consumption: 19.6 l/100km
Price: Dh380,000
On sale: now
Founder: Ayman Badawi
Date started: Test product September 2016, paid launch January 2017
Based: Dubai, UAE
Sector: Software
Size: Seven employees
Funding: $170,000 in angel investment
Funders: friends
Israel Palestine on Swedish TV 1958-1989
Director: Goran Hugo Olsson
Rating: 5/5
Meydan racecard:
6.30pm: Handicap | US$135,000 (Dirt) | 1,400 metres
7.05pm: Handicap | $135,000 (Turf) | 1,200m
7.40pm: Dubai Millennium Stakes | Group 3 | $200,000 (T) | 2,000m
8.15pm: UAE Oaks | Group 3 | $250,000 (D) | 1,900m
8.50pm: Zabeel Mile | Group 2 | $250,000 (T) | 1,600m
9.20pm: Handicap | $135,000 (T) | 1,600m