Foreign banks continue to pump funds into Gulf

Foreign banks are still pumping funds into the Gulf banking sector in the hope they will net massive profits from an eventual revaluation of regional currencies against the US dollar, official figures showed yesterday.

Deposits of foreign banks with commercial banks in the GCC have sharply grown over the past two years and remained high by mid-2008 despite receding speculation about a revaluation.

Only Kuwait was an exception, with foreign banks deposits with its banks recording relative stability following its decision last year to end its currency peg with the US dollar and adopt a basket of currencies.

The foreign bank deposits with Kuwaiti banks, included in the Central Bank's report on foreign liabilities, had jumped from KD1.08 billion (Dh13.6bn) at the end of 2005 to KD2.69bn at the start of 2007.

They remained stable through 2007 before they grew by around 10 per cent in March 2008 and then plunged by nearly 20 per cent in May. The deposits finally settled at around KD2.8 bn by the end of June.

The situation was quite different in the other five GCC members, which effectively peg their currencies to the ailing US dollar.

In Saudi Arabia, by far the largest GCC country, foreign liabilities jumped from around SR65bn (Dh64.3bn) at the end of 2005 to SR105.2bn at the end of 2007. They continued their rapid climb to peak at nearly SR138.2bn at the end of May before slipping to about SR134.5bn at the end of June.

According to a leading Saudi financial consultant firm, speculation about a revaluation has largely receded but that an appreciation remains likely.

"Financial market speculation on a revaluation of the riyal against the US dollar has eased significantly. One-year riyal forwards, which measure what the market expects the exchange rate to be in one year, are at their lowest level since November 2007," the Riyadh-based Jadwa said.

"This follows clear statements from GCC central bank governors emphasising their commitment to the exchange rate pegs and progress towards the regional single currency. In addition, there is a growing consensus that the dollar has bottomed and that US rates will be raised before the end of the year. In contrast, we feel that revaluation is more likely now as the government has no other policies open to it that would have a clear and immediate impact on inflation."

Jadwa and another key financial institution, the National Commercial Bank, said speculation about a revaluation was the main reason for the surge in the foreign liabilities of Saudi Arabia's commercial banks.

In the UAE, which has one of the most open and liberal banking system in the Middle East, the currency speculation was more underscored. Deposits of foreign banks with the country's 51 commercial banks more than doubled from Dh96.7bn at the end of 2006 to Dh212.4bn at the end of last March.

Qatar, which controls the world's third largest gas deposits, also reported a surge in its foreign liabilities from around QR24.7bn (Dh24.9 bn) at the end of 2006 to nearly QR63bn at the end of 2007. They slipped to around QR 60bn at the end of January before rebounding to a record QR67.4bn at the end of March.

In Oman, foreign liabilities, mostly deposits of foreign banks with its banks, soared from around RO1.39bn (Dh13.2bn) at the end of 2007 to RO1.57bn at the end of May, according to the Central Bank of Oman.

Bahrain, which has the smallest GCC economy, said its bank foreign liabilities leaped from around BD786m (Dh7.5bn) at the end of 2005 to BD1.49bn at the end of 2006 and BD4.9bn at the end of 2007. They peaked at BD5.6bn at the end of June.

"In our view, the costs of changing the exchange rate far outweigh the benefits, particularly as imported inflation is an insignificant part of the current inflation story in the region," said Brad Bourland, chief economist at Jadwa.

"Changing the peg to the dollar may make sense over the long term, as the economy diversifies and central banks develop a need for more independent interest rate setting tools. That time is not here yet, and changing the exchange rate primarily to chase dollar movements would now do more harm than good."



The numbers

KD2.69: billion was the foreign banks' deposits with Kuwaiti banks at the end of 2007

SR 105: billion was owed by Saudi Arabian banks as foreign liabilities

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