UAE federal structure handles crisis well

UAE stocks picked up yesterday on news that the UAE Central Bank is about to lower interest rates as a part of its strategy for handling the global financial crisis.

On the same day it was reported that Abu Dhabi Commercial Bank is to convert $1.8 billion of federal government deposits into Tier II capital and that the Commercial Bank of Dubai is also converting $500 million of federal deposits in the same fashion.

Calm response

The calm and measured response of the UAE Central Bank to the global financial crisis shows federal institutions responding well to the slump in the world economy. The contrast with fellow GCC member Kuwait, with its current political chaos and bank defaults is notable.

UAE bankers say an even more comprehensive response is coming, in particular to address the imbalance between loans and deposits, a matter already highlighted by the Governor of the Central Bank in a recent speech.

If the UAE is serious about realizing the objective of becoming the region’s banking centre then this is exactly the right way to go about it, and bankers in London and New York will be taking note. It is only in a crisis that systemic strength is tested.

They will be watching the next steps with interest. It seems that far from disengaging from heavily indebted Dubai, Abu Dhabi is seeking a harmonious federal solution to the benefit of all citizens, and residents with employment.

Dream ticket

Harnessing the financial strength of Abu Dhabi to the commercial and entrepreneurial dynamism of Dubai sounds like a winning formula. This is the dream ticket that larger and more systemically challenged countries could only hope to emulate.

That said the UAE is hardly out of the woods entirely with oil revenues set to tumble by half in 2009 and the six-year real estate boom obviously over. Banks will need recapitalizing to meet the strain on their balance sheets and to assist customers through a very tough time.

But looking forward this could still prove to be a seminal moment in the emergence of the UAE federation into an admired, respected and again highly profitable business model.
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