Are UAE banks broke?

Are UAE banks broke?

Despite government bailouts, tight liquidity persists throughout the Emirates.

May 7, 2010 10:18 by Emily Meredith

The issue, then, is the lack of transparency. Banks are reluctant to own up to non-performing loans, either hoping loans will begin to be repaid at some point or hoping that they can delay any announcement of nonperforming loans until after they’ve recovered more.

The ministry of finance injected AED70 billion into the country’s national banks in three states, a move central bank governor Sultan Bin Nasser Al Suwaidi said in a speech last year should have improved the banks’ capital positions in case the ratio of nonperforming loans should rise.

And that figure did rise. Gulf-wide, the ratio of nonperforming loans increased to 5.4 percent in September 2009 as compared to 2.7 percent in 2008, according to Emmanuel Volland at Standard & Poor’s. “At the same time, the coverage by loss provisions reduced sharply to 87 percent by September from more than 150 percent by yearend 2008,” he says.

Soussa is careful to say that the ratings agency believes Abu Dhabi has the capacity to provide support, but noted that the “UAE’s balance sheet is limited.” As great as the wealth is, it is not boundless.

Meanwhile, the extent to which the UAE government can increase the cash flow in its banking system is determined by the country’s peg to the dollar. The fixed exchange rate is severely limiting.

Countries usually have two ways of influencing the supply of money in the economy: through monetary policy and fiscal policy. In countries without a fixed exchange rate, the central bank can lower the prime lending rate, increasing the amount of cash in the system. But in the UAE, the central bank is constantly buying and selling dollars in order that the supply of money matches that of the United States.

If the bank took measures to increase liquidity, the dirham would be devalued relative to the dollar. That devaluation would cause people to sell their dirhams to buy dollars, cancelling out any currency action taken by the UAE central bank.

In terms of fiscal policy, the governments can tax and spend to add to their coffers or increase money in the economy. However, the UAE, like many Gulf economies, is mostly tax free. The government does not have the option of raising funds for a specific purpose.

The only tool government has is to spend its own money in order to spur cash flow. Government support has improved liquidity in the Gulf in recent months, according to Standard & Poor’s. “Gulf banks appear to have become more cautious about loan approvals. Most banks have lowered their growth targets and, in some cases, their balance sheets have shrunk,” says a report. The rating agency also called the UAE central bank’s approach “interventionist.”

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Tags: Burj Khalifa, dollar peg, Dubai debt, liquidity, nakheel, UAE banks

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3 Comments

Anupama V. Chand on May 10, 2010 2:55 pm

As I see it, there are two problems that the UAE is going to have to primarily handle. I would like to clarify at the outset that I am no financial whiz nor indeed any kind of economic analyst, and would not dare to presume such a position. However, as a lay person who has been a resident of this country over the last 15 years on and off, I have to say that transparency of the country’s financial institutions has become its biggest Achilles heel when it comes to attracting long-term foreign investment, and detracting long-term debtors from bolting into the blue, causing millions of dirhams to disappear, which could in any country with legitimate and transparent financial rules have been retrieved through bankruptcy procedures.
Most international investors with very systemic procedures would hesitate before investing in such a country, let us be realistic in examining our flaws here. It is also a bit of a catch 22 trying to be transparent in the UAE, where the tradition of declaring things upfront has never really been valued. One must certainly not live in the delusion that there is no wealth in the UAE, or that the country as a whole is facing a liquidity crisis, that would be too premature. Abu Dhabi is considered to be one of the wealthiest cities in the Arab world, with hitherto undisclosed reserves of wealth, which if push came to shove, it could certainly help Dubai out with. Dubai for its part would need to overhaul its banking, insurance and financial systems and procedures, so that it is not just a question of showing transparency and convincing the world at large, but making it credible enough for residents, citizens and any average man-on-the-street to know that his money is saving. This in times of recession, when the Emirate is exposed to international markets that are reeling under a fresh wave of shake-ups is going to be the biggest challenge. The international media has not given Dubai an easy time of it either, trying to knock it down in its beleagured state, and deliver the final blow….Dubai has recovered much better than expected, however much needs to be done to bring back the vibrancy that existed. Time perhaps to take stock and re-evaluate.
Baker on May 11, 2010 9:32 am

Delaying paying contractors and/or consultants by government or semi government entities has been endemic in this area for as long as I have been there (35 plus years). Often on the flimthiest of excuses.
Now of course we have the mother of all excuses: the world economic situation.
What is conveniently ignored is that many of these mega projects should never have been awarded in the first place because their finance to enable completion was not properly arranged.
That being said, I sincerely hope all will be sorted out somehow and soon because it is still a great place.
Miss Anne Thropic on May 11, 2010 10:30 am

If I was a bank, I’d be very wary about loaning anyone any money right now, whether it’s a big company or an individual. So many projects in Dubai were built on credit and won’t be completed any time soon. That had to stop, as does the rampant offering of higher and higher credit limits on cards for personal customers. Encouraging debit card usage instead of harassing customers with irresponsible credit card offers would be a step in the right direction too.