Jittery UAE banks reach for lifeline

Jittery UAE banks reach for lifeline

And others in the region may follow. “It's as close as this place comes to a reality check,” says one analyst.

September 23, 2008 12:31 by kippreport

Scott MacMillan

As Kuwait signals it may copy the UAE’s central bank’s move to provide a lifeline to local banks by injecting more liquidity into its financial system, forgive us for echoing the characters in the Star Wars movies who say, whenever things are about to take a turn for the worse, “I have a bad feeling about this.”

As we pointed out yesterday, quoting Standard Chartered, maintaining economic equilibrium in the Gulf will be a difficult needle to thread with the global financial system in all out panic mode. A sudden lack of liquidity, after all, is not the only problem. Also of increasing concern to cautious bankers – and the point is that not all bankers are necessarily cautious – is the Gulf’s soaring credit growth.

Not to mention the greatest bugbear to stalk the UAE economy: double-digit inflation. Putting more money into the system is not likely to help the UAE central bank keep inflation at its stated target of 5 percent, which one can flatly say looks unrealistic at this stage.

Journalist Sonia Verma, writing from Dubai in Toronto’s Globe and Mail and London’s Times, seems to have been the first to make the link between the central bank’s cash injection and a perceived need to maintain the region’s property boom.

The UAE sudden liquidity crisis was caused, in part, not just by international credit drying up, but by soaring growth in domestic loans. Borrowers have used many of these loans to buy property. Even loans categorized by banks as personal loans rather than mortgages are often used to make down payments on properties, making it difficult to see local banks’ true exposure to the property market.

Recall, in that context, yesterday’s prediction that house prices in Dubai would fall some 20 percent by 2011. It should be noted that wouldn’t be as great a shock as it might initially appear, especially if, as many expect, prices rise far more than 20 percent between now and then.

Even so, headlines predicting the housing bubble will burst, or at least moderately deflate, are increasingly appearing in Dubai media. In a market partly driven by speculation, as Dubai’s is, perception can quickly become reality. One can’t blame bankers for being nervous given what has happened in the US.

Kipp is also probably not the first to read sinister economic motives in Dubai’s continuing effort to force middle-income families and single bachelors (and bachelorettes) out of shares villas and flats. One would be forgiven for thinking somebody out there wants housing to remain dear.

Bahrain’s Gulf Daily News notes that UAE “has become the first regional country to show signs that it may be facing a liquidity problem in its financial system,” implying that others may follow, although Bahrain’s central bank says everything is fine there.

In Kuwait, the papers say banks have been asking for help from the central bank, which has responded by saying it is ready to take “to provide any local banking institutions with the necessary liquidity if there is a need for that.”

The Globe and Mail quotes an unnamed analyst who works closely with a prominent Dubai developer. He says the mood on the property market remains tense even following the liquidity injection. “It’s as close as this place comes to a reality check.”