Market Insight 17 - 24 July 2009 (PDF 37 pages)

•Overview - Opportunities in uncertainty

•More upside for Indonesia

•Botswana - Assessing the risk to FX policy

•UAE - Problems, but oversold

Liquidity is gradually improving, but is far from adequate

The UAE faced a liquidity crunch for two main reasons. First, banks increased lending
aggressively during 2008 and this was partly funded by hot money which entered the UAE largely in anticipation of a currency revaluation. When the hot fl ows reversed, banks faceda funding gap. Second, the transmission mechanism is not functioning properly and interest rate cuts are not having the desirable effect on market interest rates.
While liquidity in the UAE is beginning to improve, it remains inadequate. We estimate that at the beginning of the year the funding gap for banks (i.e. the difference between deposits and advances) was approximately AED 120bn (c. USD 32.7bn). This led to a significant slowdown in credit, and at the same time drove market interest rates higher as banks competed for deposits. The gap narrowed significantly to AED 31.2bn (c. USD 8.5bn) as of May 2009. This allowed banks gradually to resume lending; it also alleviated pressure on market interest rates.

•Brazil - Regional growth leader

•iTraxx AXJ IG vs. US CDX IG - Convergence trade idea