Smooth riding for UAE economy amidst global credit crunchMajor nations in the world are desperately trying to fight against the credit crunch and striving to rise uninjured from the recession, we spot UAE with rather stable economy and position. Let's analyze the reasons and factors that helped the country to upbeat the global pressures. Many experts in Dubai predict that the health of the emirate's economy will only be mildly affected by the ongoing international financial crisis, though a further draining of liquidity is a matter of concern.
The liquidity crunch that is playing out in the global markets is a result of crisis of confidence among banks. The collapse of large banks and financial institutions such as Bear Stearns, Lehman Brothers and AIG has shaken the confidence of banks to freely lend to each other, as everyone is guessing who is next. As a result, many banks which relied on short-term wholesale funds from other banks, are finding it difficult to raise such funds any longer, leading to a liquidity crunch.
Local banks in Dubai have experienced low levels of exposure to failing US banks while the tightening of the international credit market has made it harder for banks to obtain short-term funding to cover their obligations. As a precaution measure Central bank of the United Arab Emirates (UAE) announced on September 22 that it was making $13.6bn available to local banks to bridge any liquidity shortfalls. Anticipated tighter liquidity is already speeding up mergers. Tamweel and fellow Dubai-based mortgage lender Amlak Finance entered into $2.4 billion merger, a proactive measure to spur international growth.
Recent announcement His Highness Shaikh Mohammad Bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, has ordered a Dh70 billion transfer to the Ministry of Finance to pump liquidity into the banking sector. The new transfer brings the total emergency funds for the UAE banking sector to Dh120 billion.
Move by nations to overcome credit crunch
The UK government has announced a package of measures aimed at rescuing the banking system that makes available £400bn ($692bn) of fresh money. It will initially make extra capital available to eight of the UK's largest banks and building societies in return for preference shares in them. The UK and the Spanish governments, along with a few others, issued plans to recapitalise major banks with public funds. Moreover, the UK government will guarantee new bank debt issuance for those banks that participate in the recapitalisation plan, thus securing banks' short-term and medium-term funding.
The Fed and the US Treasury introduced a new facility (the CPFF) to buy three-month commercial paper in size, both from eligible financial and non-financial issuers. This is a major new step, as it not only provides banks with additional financing, but also means that the Fed will (via a SIV) lend directly to companies.
There is some rub-off effect of the global liquidity crisis on India as well, because foreign institutional investors are selling domestic equities exacerbating pressure on rupee. However, this has only a marginal impact on liquidity; there is no crisis of confidence among banks in India to lend to each other, as is being seen in global markets. To tackle the liquidity crunch in the Indian credit markets, RBI (Reserve Bank of India) announced the CRR (cash reserve ratio) cuts as these infuse the much-needed liquidity into the banking system.
UAE Property sector and Credit crunchGlobal economic downturn will not be having a major effect on Dubai's property market. High demand and shortages have driven up prices at huge rate and the question is whether it will sustain for long? With an expanding economic base, ample reserves, high domestic demand and a strong programme of infrastructure and development projects drawing investment, Dubai may find itself better equipped than others to handle a crisis.
The Gulf's oil-fuelled boom has so far protected the region from the major upheavals that have shaken the financial and property sectors in the United States and Europe. A worsening global credit crunch will not have a major impact on Gulf oil producers as they soak in mammoth crude exports liquidity that allows their governments to more than offset funding for development projects. Despite a slide of nearly 50 per cent in oil prices over the past few weeks, the six Gulf Co-operation Council (GCC) countries are expected to net their highest ever budget surplus in 2008 while they continue to supplement funds on development, tempted by rapidly accumulating overseas funds.
Four GCC members in Opec - the UAE, Kuwait, Saudi Arabia and Qatar - netted a staggering $423 billion (Dh1, 554bn) in the first nine months of 2008; more than double what they projected in their budgets for the whole of the year. Demand for UAE property has been rising faster than the developers can build as more expatriates arrive every year, pushing up both sale and rental prices and fuelling inflation. UAE state news agency WAM said that a shortage of at least 28,000 housing units in Abu Dhabi this year was still pushing up rents and stoking inflation. Projects that are now being completed will supply only 20 percent of housing needs.
In its World Investment Report 2008, the United Nations said that while it predicts a downturn in the global trend for investments, with a 10% fall in FDI overall, there will actually be an increase of inward capital flow into the Gulf countries. With the region being largely unaffected by the sub-prime mortgage crisis, and with a significant number of major investment energy and construction projects in the pipeline, capital inflow will remain strong, said the report, issued on September 24.
GOWEALTHY.COM © 2008
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(Source: The facts and figures cited in this article are compiled from sources believed to be reliable like News agencies, Information portals and Online Research reports)
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