Dubai's resurgence to stimulate bank lending this year

Dubai's economic recovery will spur a rebound in bank lending across the UAE this year after borrowing in the country grew at the slowest pace in the region in 2012.

Credit growth in the second-biggest Arab economy may increase to between 5 per cent and 10 per cent this year, according to Moody's Investors Service and Arqaam Capital. Lending rose 2.6 per cent in 2012, the slowest pace in the six- nation Gulf Cooperation Council. That compared with a surge of 16 per cent in Saudi Arabia, the biggest Arab economy, and 27 per cent in gas-rich Qatar, according to central bank data.

Dubai's companies are stepping up investments as the government forecasts economic growth of more than 4 per cent amid a recovery in tourism, trade and property from the 2008 property crash. Neighbouring Abu Dhabi is boosting spending on projects including an airport terminal and the world's biggest aluminum smelter as the sheikhdom diversifies its economy.

"The risk appetite has improved, especially with the Dubai banks," Shabbir Malik, a Dubai-based analyst at investment bank EFG-Hermes Holding SAE, said by phone April 11.

Bond sales in the UAE reached a record US$7.8 billion in the first quarter, as Dubai Islamic Bank, the emirates' biggest Sharia-compliant, raised $1bn and Dubai sold its first 30-year debt. The risk investors demand to hold Dubai's debt tumbled to 210 basis points yesterday from 355 basis points a year ago, CMA data on five-year credit default swaps show.

The emirate's economy expanded about 4.1 per cent last year, according to government estimates, as passenger traffic through its airport rose 13 per cent to 57.7 million, making it the world's third-busiest, Dubai Airports said. The recovery helped Emirates NBD, Dubai Islamic Bank and Mashreqbank, Dubai's three biggest lenders, to post faster loan growth than three of the top-four Abu Dhabi-based banks, according to data compiled by Bloomberg. Only lending at First Gulf Bank grew faster.

Investment is also picking up in Abu Dhabi. Emirates Aluminium, which is building the world's biggest aluminum smelter, received $4.3bn in loan commitments to fund expansion, a banker familiar with the deal said in January. Abu Dhabi that month awarded a contract to build a branch of the Louvre museum.

Dubai's banks are lending again "because the core economy is doing well and they want to participate in that growth," Khalid Howladar, a senior credit officer at Moody's, said by phone on April 11. "Government spending is picking up in Abu Dhabi with projects resuming at a moderate pace and the prospects in retail are pretty good, as the economy does well."

* Bloomberg News