Economy faces new challenges

• Text size
•  
•  

Central BankCentral Bank

These efforts, along with similar measures elsewhere in the Gulf, have helped bring down the interest rates banks charge each other on short-term loans. They have also left banks with stronger balance sheets.

Nevertheless, in the latest sign that responses to the financial crisis may not shield oil-rich Gulf countries from a global slowdown, Sultan al Mansouri, the Minister of Economy, said last week "there could be some contraction" this year. "If the world economy goes on like this it will be contractive."

That threat of contraction has made businesses and individuals more reluctant to borrow money, bankers say.

During tough economic times, businesses typically cut back and borrow less, fearing that they will not be able to put the money to productive use. Individuals tend to borrow less because of uncertainty about their ability to repay loans.

This has led to a conundrum. While banks are more able to lend money and finance economic activity thanks to the stimulus measures, finding willing borrowers is a challenge.

"We are finding it difficult to fund businesses because they are afraid to borrow," said Graham Honeybill, the general manager of the National Bank of Ras al Khaimah (RAKBank)National Bank of Ras al Khaimah (RAKBank), one of the nation's largest retail banks.

Individuals, too, are feeling pressure. Defaults on credit cards have risen, bankers say, and many banks have imposed more stringent standards on loans ranging from car financing to mortgages.

"Credit cards are usually the first to suffer [in performance]," said Ian Hodges, who heads personal lending at RAKBankRAKBank.

"I do not believe that defaults as a percentage of assets will go up, and if so only marginally."

One major obstacle to reinvigorating lending activity has been loan-to-deposit ratios above 100 per cent at most of the UAE's banks. These ratios rose largely because deposit growth failed to keep up with loan growth at the outset of the financial turmoil last year.

To lower loan-to-deposit ratios, many banks are restricting lending while offering high rates on term deposits to bring in more cash. Dubai Islamic Bank, for example, was recently offering a 6.25 per cent profit rate - the Sharia-compliant equivalent of an interest rate - on its one-year term deposit.

More deposits have helped reverse banks' reluctance to lend, industry sources say. But credit remains much tighter than it was a few months ago.

"All [UAE] banks have tightened their lending criteria to a certain extent," said Robert Thursfield, an analyst at Fitch Ratings in Dubai.

Analysts have also become increasingly worried about the loan books of Emirates banks, particularly credit cards and consumer loans. Last week, the ratings agency Moody's said it may downgrade HSBC Middle East partly due to the "potential of rising delinquencies".

"Funds are definitely available," said Gerhard Hametner, the head of MAC CapitalMAC Capital, a boutique investment bank. "But banks will give money to businesses who have a long-standing business model and strong recurring revenues. They will be flooded with requests."

As banks adjust to these circumstances, global economic conditions continue to look bleak.

Robert Zoellick, the World Bank president, said yesterday the global economy would probably shrink by between 1 per cent and 2 per cent this year.

"I think 2009 is going to be a very dangerous year," Mr Zoellick said at an event in Brussels, according to Dow Jones.

By Asa Fitch and Uta Harnischfeger

© The National 2009