UAE government actions will attract Arab capital

The $33 billion that the UAE has injected into its banking system over the past month, combined with guarantees for all deposits of any size in both local and global banks in the Emirates, is a strong reminder that in financial crises there are always winners and losers: and the UAE is going to be one of the winners.

This small Gulf State is cash and resource rich. In a global environment of de-leveraging and asset price deflation that means that in the long run the Emirates just has to emerge on top. For the UAE is a net lender and not a net borrower. Even the $47 billion debt that Moody’s reckons is owed by Dubai Inc. is tiny in comparison to total net national assets.

In the short term the government is taking strong proactive measures to see local confidence through a difficult patch. And $7,000 per capita injected into the banking system shows real strength. But the important point is that unlike the Western nations this money comes from reserves and does not have to be raised as debt.

UAE a safe haven

Now where are Arabs around the world likely to want to keep their cash in the future? In the debt ridden nations of the West whose banking systems could still face further problems – a collapse of bond markets or a flight to precious metals, for example.

Would it not be safer to keep capital in a country where the government is committed to looking after your cash, and pursuing aggressive growth policies that will keep your money producing a decent return?

Lebanon has reported a flight of capital into its banks from the West. Besides we have a recent clear precedent for this influx of cash in a global crisis. Remember how after 9/11 plane loads of Arab cash and gold returned to the region in a hurry fearing American expropriation?

Now the fear is that a further deterioration in the US economy will crush stock and bond prices. One thing we do know about banking crises is that their impact does not go away quickly. It will take years to repair the damage of the past few weeks. Banks under national control are not likely to be expansionary, and they still have to feel the real impact of the coming recession on their balance sheets and revenues.

1930s

If you look back at the 1930s then the US banking system faced three crises: first, bad loans after the 1929 stock market crash; secondly a crisis in the bond market; and third a flight to precious metals as depositors emptied their accounts. This took three years, so if we apply this now we are not even half way there.

Swift and united action by global governments this week almost certainly means that the worst of the 30s banking crash has been avoided but this pattern is still likely to play out. That means there is yet more financial trouble on the horizon and shifting assets to safe havens like the UAE and precious metals makes good sense.

For the UAE the crisis could actually keep its economic boom rolling for somewhat longer than otherwise as foreign capital will return to this market, giving shares and real estate some support. But if the crisis does produce a reality check in the real estate market – and a correction of the worst excesses – that will also be good for long term stability.
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