ArabianMoney.Net

Better late than never the US Senate has passed the $700 billion rescue bill for the US banking system, and it now goes to the House of Representatives. If it passes this means that the US economy will most likely stay in recession rather than collapse into a depression.

But this will come at the price of higher levels of inflation in future years, and further dollar weakness after an initial rally. However, this is not a return to business-as-usual for the US economy.

More shocks and surprises are still inevitable. Crucially the volume of US credit is still going to contract due to regulatory and market pressures: that is not good for the US consumer and it is not good for US business. Profits will fall sharply and a Wall Street Crash can not be ruled out.

So what does the bailout mean to the UAE? The most obvious benefit is that the oil price is not about to fall through the floor, as it would have done with a US depression scenario. A shallower recession will likely mean lower oil prices but nothing like the dive to $10 a barrel seen in 1999. Oil analysts say prices are not likely to fall below $60-70 a barrel.

Secondly, the bailout package will probably be well received by the UAE stock markets. They should see their traditional post-Eid holiday rally on re-opening next week. Investors have been lucky that the bourses were closed this week for the holidays, avoiding a choppy ride.

Global credit markets should now begin to gradually improve unless there is another shock. That is far from out of the question.

Several European banks have been nationalized or rescued by their central banks this week. And who knows what sort of a mess the hedge funds have got themselves into after third quarter redemptions. The unwinding of derivatives in the banking sector remains another potential big hazard.

The most immediate problem locally could come in the rolling over of $20 billion lent to Dubai government entities for real estate and infrastructure projects. Credit in global markets is now harder to obtain and much more expensive with Libor at record levels. It could be that the Dubai has to obtain federal loans to replace this debt.

Local banks have been granted access to a Dh50 billion emergency lending facility but have been reluctant to take it because it is relatively expensive and might be seen as an indication of balance sheet weakness.

Therefore, some slowdown in finance for projects across the UAE still looks inevitable in the wake of the crisis. But with strong direct government support for many projects this is going to be a consolidation of the recent boom and far from a collapse. UAE rates of economic growth will cool from recent double digits but could easily remain among the strongest in the world next year, if not indeed the strongest in the world.

The bailout package is also unlikely to do much to prevent a slowdown in the growth of the tourism sector, as guests from many countries are in financial difficulty. The expansion of local airline fleets, airports and hotels is not coming at a good time.

Real estate prices in Dubai should also see a slowdown in price rises, and the selling of new off-plan projects could become very much more difficult at least in Dubai, perhaps not Abu Dhabi just yet: partly because Dubai off-plan supply is so high and partly because the global credit crisis will remove many potential buyers. However, completed property remains in very short supply in Dubai, and demand is huge, so price falls look most unlikely for sometime to come.