Dubai will be able to manage debt, says EIU

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Dubai will be able to manage the current debt problem but more efforts are needed to ensure recovery in its real estate and other sectors in the long term, the Economist Intelligence Unit (EIU) said yesterday.

Analysts in the UAE supported that view and said they believed the debt problem would have little impact on UAE banks given their massive resources and a sharp increase in their loan-loss provisions this year.

"Our view is that the strictly financial aspects of this crisis can and will be managed through identifying the really distressed assets and paying off creditors through liquidation proceeds and financial support from Abu Dhabi," EIU's Middle East Editor David Butter said in a statement sent to Emirates Business.

However, there will be long-term economic consequences. Real estate and leisure-based tourism development will struggle for growth for a time to come and prospects for the financial services sector are not good.

"Dubai's core competence as a logistics and trade centre will help carry it through this crisis, but there is little chance of a return to normal business."

Although some banks in the UAE have already revealed their exposure to the Dubai WorldDubai World debt problem, analysts believe this will have no major impact on the general performance of the country's banking sector.

They said the 24 national banks and 28 units have built up a strong provision base over the past few months because of the Saudi family business debt default crisis and that they have access to more liquidity at the Central Bank, which announced such a facility on Sunday.

"I believe Dubai will pull through as it has the resources and the experience to do so... as for the banks, I think they are immunised and fortified from many sides, including the new Central Bank measures and its previous measures to guarantee deposits," said Humam Al Shamma, financial analyst at the Abu Dhabi-based Al Fajr Securities, a key UAE investment and stocks firm.

"I am sure that if there will be any effect on the banks, it will be minimal. Most of them have massively increased their bad debt provisions and their capital and reserves. I believe these reserves are sufficient to face a new crisis. As for their performance in the fourth quarter, I still can say it will be much better than the fourth quarter of last year but it could be affected by more provisioning in the past two months. The impact could be stronger if the Central Bank asks them to take more provisions against their exposure to Nakheel but I don't expect it to do so."

Central Bank figures showed non-performing loans provisions by the country's 52 banks hit a record Dh29 billion at the end of October, surging by around Dh9.3bn since the start of the year. Their capital and reserves also surged by nearly Dh67bn to about Dh211.7bn at the end of October.

The figures showed the banks are also still major investors in Central Bank's certificates of deposits, with a total value of Dh74.6bn.

Total assets soared to a record Dh1.536.4 trillion to maintain the UAE's position as having the largest banking system in the Arab World.

By Nadim Kawach

© Emirates Business 24/7 2009