Arab Spring liquidity to help shield the UAE from eurozone sovereign debt blow-up

For the United Arab Emirates this is not quite late 2008 all over again with round two of the global crisis about to break with the bankruptcy of Greece. A flood of liquidity from the Arab Spring leaves this region’s safe haven flush with cash just at the right time.

This money has come from direct capital inflows to the local banking system. Transfers by worried Arab businessmen and from a surge in tourism because the alternatives are unsafe. There has also been a protracted period of very high oil prices bringing bumper oil revenues this year, the highest in the nation’s history.

Cash in the bank

The money is literally in the UAE Central Bank. Local interest rates have fallen and bonds have been issued at low coupons. However, the global economic environment is clearly changing for the worst and maybe about to get very dark indeed.

Many other emerging markets are perilously exposed to a squeeze in credit from the global banks. European bank lending to the emerging markets is already sharply down because of a shortage of dollars in the system and crisis cash management.

That could well pose a problem for Dubai with its debts that fall due next year but clearly help will be available closer to home if it proves necessary. Two years ago Dubai borrowed $20 billion in low-cost bonds from Abu Dhabi. Asset sales are always an alternative but the emirate has a preference for avoiding the sale of its best companies if possible and borrowing instead.

Dubai has also spent the last two years vigorously refinancing its debts and sorting out the mess left behind by the collapse of the real estate boom. The impact of any new crisis would therefore not be nearly as severe as the last one and business is still very cautious about expansion plans.

Two years ago Abu Dhabi effectively put a floor under the UAE real estate crash that followed the global financial crisis of 2008. In doing so it both protected its own investments in Dubai and the reputation of the UAE.

China crisis?

China with its $3.2 trillion in foreign reserves could afford to bailout its economy again but not to the same extent as in 2008. The IMF says Chinese loans have double to 200 per cent of GDP over the past five years, a faster build-up of debt than the US subprime crisis or Japan in the 1980s.

This is actually the biggest bubble in history, though such is the Western deference to China these days hardly anybody will dare say it. If China rolls over like Japan in 1990, three years after the 1987 Wall Street Crash, then the world economy will feel a deflationary shock, partcularly to the commodities complex including oil.

That would be very bad news for cash flow through-out the Oil States and cause further damage to those entities still recovering from the global financial crisis of three years ago.

The UAE would not escape as the most globalized nation in the region. But it would not be as dramatic as the impact of the last global financial crisis if only because the economy is not in a boom period this time around, and Arab Spring liquidity is putting serious cash into the system.