UAE growth forecast to slip to 4%

The global financial crisis will dampen the UAE's economic growth, the Central Bank Governor says.

ABU DHABI // The global financial crisis will dampen the UAE's economic growth, the Governor of the Central Bank Sultan Nasser al Suwaidi said yesterday. Mr Suwaidi said he expected growth to fall to four per cent this year, down from seven per cent last year, because of the global credit crisis and the shockwaves being felt by the domestic banking system.

He said the situation "is putting pressure on everything in the external world. Therefore, that's going to cause a slowdown in the economy". Mr Suwaidi added that banks would have to make provisions for falling property values, but was confident they would be able to service their debts. The IMF estimates gross domestic product (GDP), the benchmark measure of the value of goods and services produced in the country, grew at 7.4 per cent in 2007, after accounting for inflation.

Analysts said a slowdown was inevitable given talk of recession, even depression, in the developed world. Imran Ahmed, managing director of asset management at Mashreqbank, called the projection "reasonable growth". "The slower GDP growth rate reminds us that the United Arab Emirates is part of the global marketplace. It is subject to the high and low tides of the world economy," Mr Ahmed said. "Still, in a world plagued with talk of recessions, depressions and all sorts of crises, maintaining a reasonable growth rate demonstrates the resiliency of the economy, and the major strides made in diversifying dependency away from oil prices."

The global outlook has contributed to a drop in share values in Abu Dhabi and Dubai, by 38 and 66 per cent respectively so far this year. Faced with the prospect of a global recession, oil prices have fallen by two-thirds in four months. The credit crisis has spilled over into the domestic banking sector, with the nation's largest home loan company, Amlak Finance, announcing last week it had temporarily suspended lending.

Amlak did not fully explain its decision, saying it was a temporary measure while it reviewed its credit policy. Other lenders have also reduced lending as credit on international markets has dried up. The Central Bank has offered cash to banks to boost their deposit levels and increase confidence, but this has yet to lead to any significant increase in lending between banks, which is indispensable for a healthy economy.

Mr Suwaidi said the interbank market was tight, not because credit was unavailable, "but because rigidity has developed in the market out of fear of what will happen in the international global financial crisis. "They are not lending at the same rates as before. That is quite natural at this point in time. It's the response of banks to the interbank squeeze," he said, adding that Amlak's decision was part of this process.

"Everybody is very careful about lending at this point in time because there's a shock in the system, the interbank system." It was unclear how long this situation would last. "This is the one million dollar question," Mr Suwaidi said. On the fall in property values, he said: "In the economic downturn all sectors of the economy slow down by a certain degree and we have to take proper provisions at banks, and that is what we intend to do."

But Mr Suwaidi said he did not yet know what the volume of provisions would be. "I don't know before we see how they develop into next year. We will take whatever downturn, whatever decline in value there is, we will take it into provisions. And because UAE banks are well capitalised, we will have no problems to meet this extra provision." There was also "absolutely no problem" with foreign debts owned by banks, he added.

Some analysts have questioned the ability of some companies and institutions to refinance loans as they come due over the next few months, given the lack of credit available internationally. "In terms of banking, I don't see any danger. We are willing to meet all the external debt of banks," Mr Suwaidi said. "It's a matter of time. Whenever they mature, we will replace them and we intend to repay all of them."

He said the Government had been vindicated in its decision to keep the dirham tied directly to the US dollar amid the turmoil on global currency markets. "We were criticised for staying with the dollar when it was weak, so I don't think we should be criticised for staying with the dollar when it is strong," Mr Suwaidi said, adding that the Central Bank would stick to the policy. *With Bloomberg and Reuters