The country cannot bank on growth without lending

You get the sense there are worrying times ahead for the economy of the UAE. Despite the stock market boom and the faint signs of recovery in some parts of the real estate market, question marks hang over the all important issue of growth.

The UAE's banks are still grappling with the fallout from the financial crisis of 2008 and 2009. Duncan Chard / Bloomberg News

You get the sense there are worrying times ahead for the economy of the UAE.

Despite the stock market boom and the faint signs of recovery in some parts of the property market, question marks hang over the all-important issue of growth.

The UAE is not alone in facing a growth problem. China, of all places, recently downgraded its forecasts for the year (admittedly only by a fraction, but below 8 per cent for the first time in two decades); Brazil is unlikely to hit 3 per cent this year; India and Russia similarly face growth downgrades.

The fact the Bric nations (Brazil, Russia, India and China) are struggling puts the UAE's problems in context, but the issues here are somewhat different. The still-high price of oil should not distract policymakers from the serious downside risks in the rest of the economy.

The official figure for growth last year came in at 3.3 per cent, below what most experts had been predicting.

Capital Economics, a London think tank which has proved to be on-the-nail in most of its analysis of the region, said in a recent research note the non-oil sector was a concern. "Although there is no detailed breakdown of GDP data, much of last year's growth is likely to have been due to an increase in hydrocarbon production, resulting in 5 per cent growth in oil GDP … therefore, the non-oil sector, which accounts for two-thirds of GDP, is unlikely to have grown by more than 2.5 per cent."

Of course, that is still better than many parts of the world, especially many euro-zone economies, and is a distinct improvement on 2010, when non-oil GDP is estimated to have fallen by 0.5 per cent.

Nonetheless, it is a million miles away from pre-crisis days, when both Abu Dhabi and Dubai produced long-term strategic plans predicated on double-digit growth for the foreseeable future.

Again, it is essential not to paint the picture unnecessarily black.

Trade, transport and tourism, especially in Dubai, have all been strong, with non-oil exports up 19 per cent last year and an 8 per cent increase in traffic at Dubai International Airport. The problem is that early indicators for this year show the pace of growth slowing in the non-oil sector.

There are three reasons for this, says Capital Economics, but we should not dwell too long on the first two: the threat of an escalation in tension over Iran's nuclear ambitions; and exposure to the euro-zone financial problems.

Serious though these risks are, they are largely outside the scope of local policymakers to affect.

But the third factor is home-grown, and perhaps the most immediate: the UAE's banks are still grappling with the fallout from the financial crisis of 2008 and 2009.

Once more, let's put the problem in context. Provisions for bad loans have trebled since 2008 and capital adequacy levels, at an average 21 per cent, is the highest in the Gulf. So the banks are aware of the issue and have taken steps to shore up their defences.

But credit growth is still low at 2 per cent, implying the bankers are still sitting on their cash piles, putting a further brake on non-oil growth.

By coincidence, Moody's Investors Services, the ratings agency, recently offered an explanation for the bankers' reluctance to lend: maybe they are unsure the defences they have built round their capital are adequate against the potential downside risks they face.

Moody's disclosed its latest snapshot of the state of play at Emirates NBD, one of the biggest banks in the Middle East.

While the rater leaves most of its assessments of Emirates NBD unchanged, it says they carry a "negative" outlook, reflecting "the risks and concerns surrounding the increasing concentrations, the related party lending and the restructuring of exposure to government-related issuers in Emirates NBD's loan book."

That's rater-speak for: "We still don't know how many skeletons there are left in Emirates NBD's cupboard, and they aren't telling us".

Of course, one bank is not the UAE economy. But economic growth in the country will remain fragile while banks struggle with the legacy of the crisis.