MIDEAST MONEY-US dollar liquidity tightens in Gulf after downgrades – Reuters

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* Foreign banks review exposure after S&P downgrades of 3

* U.S. regulation already hindering banking ties

* Central bank action vs speculators also hit liquidity

* Pressures greatest in Bahrain, Oman, much less in UAE

* Lack of data in Bahrain adds to jitters

By Archana Narayanan and Hadeel Al Sayegh

DUBAI, Feb 25 U.S. dollars are becoming more
difficult and expensive to obtain in Gulf money markets since
Standard & Poor’s sharply downgraded the sovereign credit
ratings of three of the region’s oil exporters last week,
bankers say.

The tightening of dollar liquidity, despite most countries’
currency pegs to the dollar, which normally facilitate dollar
supply by reducing exchange rate risk, shows persistent worries
over the region’s ability to cope with an era of low oil prices.

Some foreign banks that supply dollars to the Gulf have cut
back their credit lines to reduce risk. The result could be
higher costs for banks and companies doing international
business in the region.

“Liquidity in the local currency is not a problem at all. It
is growing. In customer deposits, it’s ample in Bahraini
dinars,” Abdulkarim Bucheery, chief executive of Bahraini bank
BBK, told Reuters this week.

“Liquidity in foreign currency, in USD, is shrinking. And
especially with the downgrade of the country, some
internationals may find it timely to cut lines. If that happens,
I’m sure liquidity will be under question.”

The dollar squeeze in the Gulf is not so far as serious as
it was for a few months during the global financial crisis in
2008, but it is significant, especially for smaller banks in the
region, bankers said.

U.S. dollar supplies appear most seriously affected in
Bahrain and Oman, affected to some degree in Saudi Arabia, and
almost normal in the United Arab Emirates, which with its
diversified economy and huge foreign assets is widely believed
to be able to handle cheap oil more comfortably than its

In early January, it cost 0.3857 Omani rials to buy a dollar
for delivery in 12 months’ time; that price is now 0.4000, said
a Gulf banker involved in quoting rates. The rate for Bahraini
dinars has risen to 0.3830 now from 0.3807 in January. Banks can
face different rates depending on their size and the scope of


Until the last few months, worries about tightening
liquidity in the six Gulf Cooperation Council nations focused on
local currency money markets, as low oil prices slashed
governments’ revenues and reduced new deposits of state funds in
banks. This pushed up short-term interbank lending rates.

Additional factors are now constraining access to dollars.
One factor is the enforcement of U.S. regulations designed to
crack down on tax avoidance and anti-money laundering rules.

These have imposed extra costs on U.S. banks, prompting many
to reduce the number of foreign institutions with which they do
business, and making international banks operating in the United
States more wary of ties with the Gulf.

Since December, the central bank governors of the United
Arab Emirates and Bahrain have publicly complained that it has
become harder for some local banks to conduct U.S. dollar

Another blow came when Saudi Arabia and Kuwait acted to
stifle speculation against their currencies in forwards markets,
bankers said. In January, the Saudi central bank urged banks not
to conduct derivatives trades that would pressure the riyal, and
this month, Kuwait’s central bank managed movements in its daily
dinar fixing to deter speculators.

As speculation diminished, trading activity in the region’s
foreign exchange market shrank and foreign banks became less
active in supplying dollars, bankers said.

A third blow came last week when S&P cut Saudi Arabia’s
long-term sovereign credit rating by two notches to A-minus,
while downgrading Bahrain to junk status and Oman to one notch
above junk. In all three cases, it cited large state budget
deficits caused by cheap oil.

The scale of the downgrades was a surprise and prompted some
foreign banks to review their exposure to the Gulf, several
international bankers said, declining to be named because of
commercial sensitivities.

“Some international banks have cut interbank lines to assess
the solvency position of domestic banks, to see if they can meet
their dollar obligations,” said one.

(Additional reporting by Stanley Carvalho in Abu Dhabi; Writing
by Andrew Torchia; Editing by Sonya Hepinstall)

MIDEAST MONEY-US dollar liquidity tightens in Gulf after downgrades – Reuters}