Foreign banks pour funds amid dollar speculation

Foreign banks are pouring funds into the Gulf amid growing speculation that regional oil heavyweights could finally be forced to revalue their currencies against the ailing US dollar, economists said.

Banking balance sheets in the UAE, Saudi Arabia and Qatar showed a sharp increase in the foreign liabilities of their banks, while there was a decline in Kuwait and a relatively stability in Oman as the first has opted to peg its dinar to a basket of currencies and the Sultanate has pulled out of the currency union. The bulk of the foreign liabilities were deposits by foreign banks with local banks in those three countries and most of the increase occurred during the second half of 2007 and in early 2008 following growing speculation that Gulf governments could keep their currencies pegged to the dollar but change the exchange rate.

Experts said an appreciation in that rate would allow foreign banks with local currency deposits in regional banks to make high profits but at the same time adversely affect Gulf banks' deposits in foreign currency. In Saudi Arabia, the largest member of the six-nation Gulf Co-operation Council, there has been a surge in riyal borrowing following heightened speculation about an appreciation of the local currency against the dollar.

"Owing to concerns about a potential revaluation, banks are borrowing in riyals, rather than foreign currency. Riyal funding is being sought from local and international banks and this, combined with foreign banks positioning themselves in the event of a revaluation, has caused commercial bank foreign liabilities to almost double since August," said Brad Bourland, chief economist at Jadwa Investment.

"The demand for riyal funding is also reflected in an increase of around SAR12 billion (Dh12bn) in local inter-bank liabilities since December and a more than doubling of the value of repo transactions with private parties, to SAR11.2bn, over the same period," Bourland said.

In the UAE, currency speculation had a similar impact, with the foreign liabilities of the country's 52 banks nearly doubling to Dh320.9bn at the end of 2007 from Dh177.6 billion at the end of 2006. Deposits of foreign banks with local banks leaped to Dh205.6 billion from Dh96.7 billion.

The Central Bank gave no figures for 2008 but economists believe the liabilities continued to grow.

"There has been an overall growth in the banking sector in the first quarter and I think this growth was also in the liabilities," said Nazim Qudsi, Investment Director at the National Bank of Abu Dhabi.

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