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Dubai: The UAE central bank set a daily limit to $200 million per day on banks' loans against certificates of deposit (CDs) starting from Monday.
Even though the interest rates on these facilities are not yet known, analysts said the move would enhance the dollar liquidity of UAE lenders in the context of tight international liquidity due to the global credit crisis.
"Over the past few weeks, it has become increasingly difficult for local players to raise dollar funding. The dirham liquidity has been ample, and this is to a great extent related to the anticipation of a revaluation. People are simply reluctant to change dirham into dollar resulting in extremely tight dollar liquidity conditions," said Marios Maratheftis, Regional Head of Research of Standard Chartered Bank.
Through this new mode of funding UAE banks will be able to borrow dollars for up to three months or at the maturity of their dirham CDs, whichever is less, the central bank said last week. Banks will be able to borrow a maximum of $200 million per day, the central bank said on its Web site.
"This facility is provided to the banks to meet their foreign currency requirements in view of the current credit crisis in the international financial markets. Banks who use this facility will not be able to sell dollars to the central bank during the period of the funding," it said.
Investors have been betting on the dirham in the context of potential revaluation. Although the loans against CDs are expected to ease the dollar liquidity for the banks, analysts said it could further fuel the speculation on the dirham
"There is a genuine risk that this dollar three-month liquidity injection will be used to fund even more long dirham positions. It is therefore likely to see even more revaluation pressure on the dirham," said Maratheftis.
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