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UAE – Dubai bails

Emirate’s $20 billion ‘stimulus package’

by Executive Staff

Earlier this year when Abu Dhabi capitalized five of its own banks, panic spread throughout the Dubai banking sector. Waiting with baited breath, bankers in the ailing emirate anticipated action by the federal or local government to rescue Dubai’s banking sector. Finally, at the end of February, the Dubai government issued a $20 billion long-term bond program, selling the first half of the bond to the UAE Central Bank (CBUAE). Central Bank Governor Sultan Nasser Bin Al Suwaidi said he hopes to bridge the banking sector’s reported $30 billion gap between bank deposits and loans and beef-up the advances- to-deposit ratio in collaboration with the Ministry of Finance. While many referred to this bond program as a ‘bailout,’ the government labeled the move a ‘stimulus plan’ for the banking sector and economy as a whole. More important, however, is the message the Dubai sovereign sent out via this latest initiative: Dubai is just as capable as its sibling emirates. Economy minister Sultan Bin Saeed Al Mansouri said he believes that the government’s latest measures should be adequate to hold up the UAE economy for the next nine months.

Road to recovery
Since the global financial turmoil began ravaging the UAE economy in the fourth quarter of 2008, many steps have been taken to ease market pressures and boost liquidity, beginning with the central bank’s $32.67 billion emergency funding facilities, followed by Abu Dhabi’s capital injection of $4.4 billion into five of its banks and now with the latest Dubai sovereign’s $20 billion bond issuance. Raj Madha, director of equity research at EFG- Hermes in Dubai, says after the Abu Dhabi bank capitalizations, “the Dubai banks were a little left out in the cold. This [bond issuance] goes some way to addressing that imbalance.”
Moody’s Middle East analyst John Tofarides reiterates the program’s benefits stating: “the banks indirectly benefit from this bond issue as federal support helps to recoup confidence in the system.” The bond issuance “alleviates potential pressures to Dubai banks for taking up loans that cannot be internationally financed as a result of dried market funding conditions,” he adds.
Robert Thursfield, director in the financial institutions group at Fitch Ratings UAE, notes it is “unclear how much, if any, of the [bond] will be used to support the banks. If some is allocated to the banking sector, then a recapitalization as per the one in Abu Dhabi could occur.” While the picture is still murky as to what the direct implications will be on Dubai banks, these days any action is good action.
Last month, Al Suwaidi emphasized the need for banks and other financial institutions to pay off their outstanding international debts, “with 100 percent reliance on local funding… At the moment, the UAE banking system is localizing liabilities of banks; that is, getting rid of foreign inter-bank deposits. Also, it is repaying syndicated loans, medium-term notes and European commercial paper to reduce risk of non-renewal of such liabilities at the wrong time.”
Inter-bank rates have been slashed across the GCC, with Madha noting that “lower inter-bank rates give headroom for profitability pricing risk.” EFG-Hermes data suggests, continues Madha, that three-month inter-bank rates “fell to a low of 1.88 percent. I think the greater issue is the perceived levels of risk — and these are still high — given pressure on labor markets, tourism, financial services and construction.”
To aid the recovery, the central bank also plans to cut interest rates by the second quarter of this year. Al Suwaidi mentioned that the CBUAE intended to ostracize the country’s banking sector from the global arena in order to protect the system against any ensuing international crises, but he insisted this would not include any rumored actions related to de-pegging the dirham from the US dollar.
Despite the latest moves by the federal and local sovereign entities, renowned ratings agency Standard & Poor’s recently announced plans to review numerous institutions for downgrade across Dubai, including four Dubai-based banks. The rationale behind the downgrade is due to the continued deterioration in the Dubai real estate market and its serious effects on local banks, as well as the overall weakening economy. The banks nominated for ratings review are Mashreqbank, Dubai Islamic Bank, as well as Emirates Bank International and National Bank of Dubai — now collectively known as Emirates NBD — due to residual debt prior to their merger.
Experts and business leaders alike find the new bond program a positive development for Dubai banks. Moreover it is “a step towards avoiding any unpleasant surprises,” says Tofarides. Thursfield trusts that this year “will be very challenging for the banks” and is confident that “the challenges will persist into 2010.” With tightened liquidity, delinquencies on loan portfolios, systemic risks, depleting deposits and much more, banks in the UAE undoubtedly have a grueling year ahead of them.

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Executive Staff


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