What does this $700bn US bailout mean for the UAE?
The Emirates Inter-Bank Rate for lending between banks came close to four per cent this week, up from two per cent as recently as May. This is squeezing local liquidity and the most immediate impact has been the falling local stock markets, albeit the withdrawal of foreign investors from the markets is probably a bigger factor, although this is also obviously linked to the global financial crisis.
The UAE Central Bank has showed its considerable financial clout with a Dh50bn emergency bank lending program to keep the local banks liquid. Foreign banks based in the UAE have been particularly hit by an exodus of funds due to the local stock market squeeze and the withdrawal of funds which had been hoping to benefit from the revaluation of the UAE dirham.
It is to be hoped that the $700 billion US bailout plan whose details should start to emerge overnight will mark an end to this ‘little local emergency’ for the UAE. The world’s largest business-to-business property show, Cityscape Dubai 2008 kicks off next week, and another sign of the times may be a sharp fall off in off-plan sales with foreign buyers absenting themselves this year.
Pain then gain
But it looks like the squeeze on global liquidity is only just starting really. US and European banks are wounded by the crisis and capital injections are just to keep them alive. A real recovery may be long and painful. Next year bank lending will suffer with cutbacks in credit to both the consumer and corporate segments. Bank profits will suffer again, and economic growth will contract. There will be more bad debts to write down. Then at the same time banks will come under a whole host of new regulations, the real price of the bailout.
In the UAE the banking sector is very well capitalized and if its lending is now reduced then it comes as the economy was in danger of overheating. Recent inflation figures and shortages of skilled labor point to an economy in need of tighter credit. This could actually be beneficial to the health of the economy in the long-run, although a short term shake-out of less well conceived projects looks inevitable as credit risk is examined more closely.
If the banking sector consolidates – and the rumors persist that the National Bank of Abu Dhabi and Abu Dhabi Commercial Bank might follow the recent precedent set by Emirates Bank and the National Bank of Dubai and tie the knot, then this again is likely to strengthen rather than weaken local banks at a time when their international competitors are struggling.
Delays to key oil and gas infrastructure projects due to the rising cost of finance will probably evaporate as the global banking system gets its inter-bank mechanisms rolling again. According to some reports, the UAE is set to almost double its oil production capacity to five million barrels per day over the next six years.
Best placed nation
No other oil producing nation can achieve this with the ease of the Emirates, given its stable politics, extremely low extraction costs and access to foreign and locally based expertise and capital. If the world is running out of oil and gas then the UAE is best placed to meet this demand, albeit at world prices. The implications for oil and gas revenues are obvious.
This is reason indeed to be confident that the foreign ‘hot money’ which has fled the UAE this year will come back. Foreign direct investment in a country with these prospects in a world short of energy will pay huge dividends. And if the Emirates faces period of slightly slower growth and a shake-out of marginal real estate projects and a focusing of resources on key areas then again this should only strengthen the recovery in the long-run.
Perhaps this is a reason why global banks are making Dubai there number one choice for expansion over the next three years. The banks follow the money, and the money is going to be in the UAE.
However, the biggest immediate impact of the US financial bailout package on the UAE is that the world economy is not about to collapse, indeed supporting the financial system with new money is likely to add to global inflation over the next couple of years. This will keep oil and gas prices at relatively high prices, and certainly a lot higher than they would have been if the global economy had collapsed into a depression.
Single currency 2010
Aside from a slowdown to previous rates of growth in the Emirates as the world enters a recession but not depression, the other major effect of the US bailout will probably be a return to long-term weakness for the US dollar. As the UAE currency is linked to the US dollar this has a clear implication for the dirham which will fall in value. But the upside will almost certainly be lower interest rates courtesy of the Fed to assist US economic recovery. In the UAE this could give the real estate boom another leg, and sharply revive the local stock markets.
It will also hasten the GCC countries with progress on a common currency by 2010 so that this bloc can collectively abandon the US dollar and revalue their currencies together. This will create a strong new global reserve currency backed by the oil and gas wealth, and sovereign wealth funds of the region and should be a major advance in the economic development of the region.
