The present global financial crisis will reduce the prospects for the UAE economic growth from high single digit to low single digit growth in 2009 and 2010, HE Sultan Al Suwaidi, Governor of the UAE Central Bank, said today.
’’The monetary Policy in the UAE will continue to be geared to maintain low official interest rates, to maintain some positive economic growth in the coming few years. The credit and banking policy will emphasize reasonable but low rate of credit expansion and restricted banking expansion,’’ Al Suwaidi said in a paper presented at a symposium organised by General Women’s Union on impact of the global financial crisis on the UAE family and family.
In his paper ’’ The Global Financial Crisis : Opportunities and Challenges’’, the central banker :’’The present global financial crisis will also impact Globalization of financial Services and local markets regulations.
Globalization of financial services will slow down, as many restrictions will be put in place in many countries.
’’There will be a move towards establishing single regulatory systems within central banks. There will be stricter adherence to prudential ratios and higher penalties for excesses against the set prudential ratios,’’ he predicted.
According to him, there will be a tendency to develop banking systems with 100% reliance on local funding, which will give more prominence to conventional commercial banking versus the more innovative investment banking.
Elaborating on the history of the crisis, Al Suwaidi said :’’The crisis started affecting the UAE Banking System during the summer months, especially during the month of August, when liquidity at UAE Banks became in short supply. Central Bank of the UAE responded by providing, towards the end of September 08, the following facilities; 1. An AED 50 billion, which was made available to banks’ through overdrawing their current accounts at the Central Bank, 2. A swap facility against banks’ 100% holdings of Central Bank CDs, and 3. A facility to discount Local Governments bonds and sukuk.
’’We have noticed that these measures and the Federal Government measures; i.e. guaranteeing deposits at all banks with significant operations in the UAE plus making an AED 70 billion liquidity facility, improved the liquidity situation at banks,’’he said.
Also Monetary Policy in the UAE, he added, was maintained in an expansionary mode and focused at a balanced economic growth.
’’Liquidity at banks is stable now as no bank in the UAE is overdrawing its current account beyond its Reserve Requirements. Interbank interest rates have come down, but still relatively higher than in some GCC countries.
’’Corporate-to-bank deposits are also high, but we are working with Ministry of Finance to put a scheme in place to reduce the interest rate of corporate-to-bank deposits by breaking the vicious cycle and rigidity that have developed as a result of the liquidity crisis.
’’We believe the scheme that we intend to put in place soon, for corporate-to-bank deposits will also influence the interbank rate and will eventually bring it down.
’’The banks consolidated balance sheet for the month of January 2009 showed a slight increase in loans and advances over the figure of December 2008, which means that banks are still lending to the different businesses, even though the rate of lending stayed as a single digit.
’’On the other hand, loans and advances on gross basis remained greater than customer deposits by about AED 116 Billion on 31 January 2009, a gap which is bridged through Bank Capitals and Reserves amounting approximately to AED 180 Billion. We believe this situation is not appropriate and we are working now on bridging this gap.
As regards the real estate loans, he said, some adjustments will take place in the real estate sector, but that will depend on levels of rent rates, which are expected to come down gradually.
’’Real estate prices, however, went down slightly due to psychological reasons driven by sellers’ and buyers’ expectations besides non-availability of bank loans sometimes.
’’We expect the real estate sector to be affected, but we must understand that this sector is very rigid and behaves some what differently from stock markets, due to the fact that a large part of the sector is owned by single and wealthy landlords who can weather high vacancy rates, as we have seen in previous crises.
Also, to analyze the possible impact of the real estate loans on banks, we have to compare our figures with figures from other countries. All real estate loans at UAE banks that is: mortgage loans, loans to corporations and loans to real estate developers stood at AED 172.74 Billion as on 31 December 2008, which is less than Bank Capitals and Reserves of AED 180 Billion. Also, if we compare financial system real estate loans to GDPs, it is: - 101% of USA GDP, - 86.3 % of UK GDP, and - 17.8 % of UAE GDP
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