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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.”