Why the UAE should recapitalize its banks

The British Government last week took a lead in the global financial crisis and bought huge stakes in several banks to rescue them from insolvency. European Governments have followed this week with a similar program, and the total now spent by governments on this side of the Atlantic is $2 trillion.

Yesterday Qatar decided to buy 10 per cent of the shares of its banks. Perhaps the UAE will now follow suit. There is no solvency issue in the Gulf States – how could there be with 40 per cent of the world’s foreign exchange reserves and huge fiscal and current account surpluses?

But bank lending in the Gulf has become constrained for two reasons: hot money from overseas has been withdrawn because speculation over revaluation has ended; and banks loans surged in the first half of the year leaving capital ratios stretched.

In the UAE the guaranteeing of all local deposits by the central bank this week has gone a long way to addressing the first issue, and funds will flow into the country as a result. But on the second point the need is for new capital injections into the banks to support the ongoing economic boom, particularly in real estate.

Free up lending

Equity purchases by the UAE governments would allow the local banks to start lending again, and interest rates should fall back globally as the impact of bank bailouts are felt in the markets.

Would this fuel up the UAE real estate boom again? It could well do. But off plan sales crashed last week at Cityscape Dubai and confidence has slipped. The need is to keep the show on the road.

The government will undoubtedly have taken note and will not want half finished projects littering the country. That is most unlikely to happen if new credit is made available to developers and to end-users as mortgages.

Positive gain

But that probably means a capital injection into the banking system to get lending going again, and local banks shares represent an excellent investment at current depressed levels anyhow. The governments could make money on this recapitalization, as if they need to with oil revenues so high.

If the government is really sensible it will accompany expansionary measures like this with greater control over lending to developers and limit the number of projects going ahead, and at the same time merge the less healthy developers with the better companies and sort out the troubled projects.

That would be my humble advice but I am only a market observer of many years with no inside knowledge. Being as rich as the UAE is an enormous advantage in a de-leveraging environment and the country should certainly emerge a net winner in this global financial shake out.