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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
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.