Abu Dhabi: The failure of the UAE banking system would jeopardise all the ambitious economic development projects planned by the country, including the Dh660 billion in projects announced at the real estate exhibition Cityscape Dubai last week.

"If the credit contracts along with the banking system there will be no other means to finance the ambitious development projects announced in Dubai and Abu Dhabi," a senior banker told Gulf News.

"Banks need the necessary capital to provide financing, and with funds flowing out of the country, the only option for the government is to step in," he added. Most banks refrain from being transparent in relation to the issue, and many claim that no liquidity crisis exists whatsoever, including the major banks.

"Transparency in such circumstances is crucial towards the government and the Central BankCentral Bank," the official said.

By the end of 2007, total bank assets exceeded Dh1 trillion, and they stood at Dh1.4 trillion at the end of last June, according to the Central BankCentral Bank, a figure that will fall by Dh500 billion as a result of the withdrawal of foreign funds.

To many observers, the levels to which share prices have plunged in reaction to the international financial collapse are very attractive indeed, as many companies are being traded at prices below their book value.

"This means that these companies will generate better value if liquidated, and it only reflects that the panic selling that is taking place is beyond any logic," said Mohammad Ali Yasin, managing director of Shuaa Securities.

Panic

"The panic prevailing as a result of the crisis is not helping anyone, and what is certain is that smart money is cautiously building positions to benefit from this drop.

"The government can also benefit from the situation as the interference will not only restore confidence, but generate generous profits as well," he added.

Meanwhile, UAE banks are on the verge of a serious crisis due to a Dh500 billion funding shortage, senior bankers revealed yesterday.

With foreigners accounting for about 40 per cent of UAE bank deposits and an increasing gap in the spread between total loans and advances and total deposits of more than Dh56 billion at the end of June, banks can only hope for strong government intervention to salvage the system.

"Foreign deposits that are being withdrawn from the system in addition to the increasing liabilities compared to assets are forcing the UAE banks into a corner," a top official at a leading bank told Gulf News on condition of anonymity.

"The Central BankCentral Bank did not actually pump Dh50 billion into the system, as these facilities are for banks to borrow. Instead, what is needed is strong government intervention by placing deposits with the bank to compensate for the outflow of foreign funds," he said.

Many bankers agree that only a minimal amount of the Dh50 billion of facilities offered by the Central BankCentral Bank has been utilised.

Total foreign deposits along with European Commercial Paper issues and Medium Term Notes stands at about 35 per cent of total assets, according to a statement by the Central BankCentral Bank on Saturday.

Meanwhile, total bank deposits fell short of total loans and advances by more than Dh56 billion in June compared to a Dh19 billion surplus in June 2007, according to official statistics fromy the Central BankCentral Bank.

"These foreign funds were actually hot money that flooded into the country during the increasing speculation about the de-pegging of the UAE dirham from the US dollar, especially after Kuwait departed from the peg," a senior executive at the National Bank of Abu Dhabi said.

"Now the trend has reversed, and accordingly we find more than Dh200 billion is being withdrawn from the system," he added.

The end of speculation in the currency market accompanied by the mounting international financial turmoil forced foreigners to abandon their positions in the UAE to cover the losses.

The impact on the stock markets was obvious, where more than Dh293.76 billion was lost in market capitalisation since the beginning of the year, of which Dh130.5 billion, or 44 per cent was recorded last week alone.

"For the government to interfere, is up to the concerned authorities, but as a market we cannot interfere, not even by diminishing the maximum limit down, a practice that proved a failure in Saudi Arabia," a top official at the Dubai Financial Market told Gulf News.

Ahmed A. Elewa, Senior Reporter

© Gulf News 2008

 

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