22 November 2008

FRANKFURT: United Arab Emirates (UAE) Central bankUnited Arab Emirates (UAE) Central bank governor Sultan Nasser al-Suweidi said the region has no intention of unpegging its currency from the US dollar despite the latter's appreciation in value recently. Speaking to Reuters on the sidelines of a banking congress in Frankfurt, he said: "We were criticized for staying with the dollar when it was weak, so I don't think we should be criticized for staying with the dollar when it is strong."

He said the bank would "stay with the peg."

Commenting on the declining value of the property market in the region, he said banks would have to take extra provisions to cover the fall in value.

"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," he said.

He said he did not know yet what the volume of provisions would be and would have to observe how the situation developed next year. "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 capitalized, so we will have no problems to meet this extra provision," Suweidi said.

Asked whether there was a danger Dubai sovereign debts would default, he said: "In terms of banking, I don't see any danger, we are willing to meet all the external debt of banks and we have absolutely no problem there. It's a matter of time. Whenever they mature, we will replace them and we intend to repay all of them."

He added that when it came to the external debt borrowings of banks, "we will have absolutely no problem in repaying, and we intend to repay" all outstanding amounts.

Suweidi said the interbank market is tight right now, but added it was 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."

"At the moment, of course the situation is tight in the interbank [market] and of course that leads to banks, banks are not so freely lending but this is a shock situation," he said. "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 of the interbank market."

The decision by mortgagelender AmlakAmlak to stop lending was part of this process.

"Everyody is very careful about lending at this point in time because there's a shock in the system, the interbank system," he said. "All banks' lending are affected, all banks, because they have to decide what to do and they have to be very careful with the interbank market. When the interbank market is not working properly like anywhere else in the world, banks are careful in the lending."

He also said he could not be sure how long the situation would continue: "I don't know, this is the $1 million question."