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

When the government of Dubai announced that it would pump a fresh infusion of $9.5 billion into real estate firm Nakheel and its parent company Dubai World in March, the news must have come as relief to the owners of certain construction firms whose cranes were at a standstill.

Dubai’s politicians said their announcement was meant to relieve months of nervous waiting by bankers and contractors hoping that cash in the UAE would start flowing again.

Despite that momentary cash relief, however, tight liquidity persists throughout the small Gulf nation. These cash flow problems are steadily trickling down, with small firms either directly or tangentially linked to the emirate’s real estate sector now saying they’re in big trouble. Stories of small architecture and consulting firms asking employees to go without payment are widespread, and companies that aren’t funded by larger international operations are closing down.

Then there’s the comparison between New York City’s Empire State Building and the tower formerly known as the Burj Dubai. The former was unveiled as the world’s tallest structure as the United States was sinking into the Great Depression. The latter was re-named in honor of Abu Dhabi’s ruler, the one man who can make Dubai’s debt problems vanish with the stroke of a pen.

So is the UAE flat broke? Will all those heady construction projects bankrupt the country? Or are liquidity issues simply the result of secretive squabbles among the ruling families as to who will bail out what, and when?

Such tight liquidity is indeed puzzling. The governments of the UAE at both a federal and emirate levels have made substantial contributions to the country’s cash situation. “There’s been a lot of liquidity support [already],” the sovereign analyst for Standard & Poor’s, Farouk Soussa, says. “If capital support were required where would that come from? A lot of capital has already been provided.”

The answer to the liquidity question is complex: In a country with already limited options, the central bank appears to be trying to force banks into maintaining greater transparency. Many suspect that, reluctant to admit problems to shareholders, the banks may not be fully disclosing non-performing loans.

On paper, none of the banks should have problems with liquidity. According to an exclusive source who has held high-level discussions with banks, the balance sheets of the nation’s establishments – which were heavily exposed to the real estate boom and subsequent bust – should allow for cash flow.

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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.