Credit slows as economy hits Dh1tn milestone

Union of Arab Banks chief says slowdown in lending growth was inevitable after boom

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Dubai is moving from being the driving force behind credit growth in the Gulf to becoming the regional laggard as projects that previously attracted investment dry up, says the chairman of the Union of Arab Banks. But despite the slowdown in lending growth in the emirate, the wider UAE economy is set to pass Dh1 trillion mark for the first time, Ahmed Humaid al Tayer, the governor of the Dubai International Financial Centre, said at banking conference in Dubai yesterday.

Lending expansion in the emirate was likely to reach 8 per cent next year, behind credit growth of up to 10 per cent across the GCC, said Adnan Yousif, who is also the chief executive of Al Baraka Banking Group in Bahrain. "Dubai cannot grow continually at a fast pace," Mr Yousif said. "What they achieved in five years in Dubai many countries can only do in 50 years." Saudi Arabia is expected to emerge as the big magnet for credit, with a pipeline of about US$100 billion (Dh367.3bn) of new projects requiring funding in the kingdom, he said.

For six yearsaccess to credit in Dubai was easy, with banks willing to provide plentiful finance as the economy expanded at breakneck speed. Credit growth suddenly slowed last year as lenders' exposure to a cooling property market shook banks' confidence in offering new loans. The Institute of International Finance estimated credit growth in the UAE dropped from record highs of 44 per cent in 2008 down to 4 per cent last year.

With a number of existing projects cancelled or delayed during the financial crisis and a reduction in the number of new schemes, analysts expect lower future loan growth in Dubai compared with previous levels. "It will be more mature than the accelerated highs of the past," said John Tofarides, a banking analyst in Dubai at Moody's Investors Service. "It will be naturally below 10 per cent." Nonetheless, Mr Yousif said he expected credit growth to return to double-digit highs eventually in the region.

"As long as the oil price is between $60 and $75 this will give the GCC excess cash and this will be stored in case of a new crisis," he said. One of the concerns among analysts is that lending in the country is not picking up sufficiently in tandem with a replenishment of liquidity within the banking sector. "The financial sector has witnessed a steady improvement in the levels of liquidity and capital adequacy exceeding the requirements of the Central Bank and Basel II, despite the high provisions taken," said Mr al Tayer.

UAE banks' capital and reserves have risen about Dh24bn in the first half of the year to reach about Dh255bn at the end of June, compared with Dh231.4bn at the end of last year, he said. Outside the financial sector, industries such as tourism, air transport, trade and re-export were continuing their double-digit growth, he said. "The sun is still shining and will continue to shine over the various aspects of economic and social life in Dubai and the UAE as a whole," Mr al Tayer said. "Today, everyone is more hopeful and optimistic as they head to their offices."

Nominal GDP for the country was expected to exceed Dh1 trillion this year. The value of goods and services reached Dh914.3bn last year, the Economist Intelligence Unit said in a report earlier this month.