Fears of capital flight from less secure markets have been raised by yesterday’s decision of the federal government of the United Arab Emirates to guarantee bank deposits and inter-bank lending.
“This should have been done in a coordinated way by the whole of the Gulf Cooperation Council”, said one official of the six-nation GCC, which includes the UAE. “Otherwise, the UAE will just suck capital in from elsewhere”.
In Washington, Josef Ackermann, chief executive of Deutsche Bank, told Emerging Markets that any country guaranteeing bank deposits and intra-bank lending unilaterally was creating “a situation of regulatory arbitrage”.
Ackermann, also chairman of the Institute of International Finance, warned that the UAE move could have implications both for offshore and onshore banking. But Mohsin Khan, Middle East and Africa director of the International Monetary Fund, cautioned against “reading too much into these moves”, which were “reassuring rather than worrying”. Khan told Emerging Markets that investors already understood that Saudi Arabia, the largest GCC economy, would “never let a bank go under”. He added: “I see the UAE move as a preemptive one to give confidence to deposit holders. They haven’t faced large withdrawals from banks.”
The decision by the UAE government was announced by the official WAM news agency, which quoted UAE president Sheikh Khalifa bin Zayed al-Nahayan saying that the government is “serious about protecting our financial system”.
The statement announced that the cabinet had taken measures “to guarantee continued economic growth”. It continued: “As part of these measures the government guarantees that none of the national banks will be exposed to any credit dangers, and [the government] guarantees deposits and savings in the national banks as well as providing guarantees on lending including between banks operating in the country and pumping the necessary liquidity into the banking system if needed.”
Separately, Saudi Arabia yesterday announced a cut to 5% from 5.5% in its repo rate, at which banks borrow from the central bank, and lowered reserve requirements to 10% from 13%. “This is also a means to generate liquidity for banks,” said Khan.
Despite the government action in the UAE and Saudi Arabia, stock markets remained jittery yesterday.
The Saudi stock exchange had closed at its lowest level in more than four years on Saturday, and the main index, TASI, rose just 0.3% on Sunday.
In the UAE, the main Dubai index fell 5.9%, and Abu Dhabi was down 2.3%. Shares in Dubai Ports World dropped over 18% to reach $0.45, after an IPO last November priced at $1.30.
The Dubai bourse cut the limit on how far stocks can fall in one day to 10% from 15% “in view of the exceptional global financial circumstances and the fluctuations currently witnessed in international markets”.
Moody’s today issues a report arguing that Dubai’s public debt of 103% of 2006 GDP could, in adverse conditions, raise the possibility of federal support from the UAE.
The Kuwaiti stock exchange dipped just 1% on Sunday, following last week’s announcement of government measures to support the bourse, including increased investments by the Kuwait Investment Authority (KIA), the country’s sovereign wealth fund.