UAE cuts interest rates, should it follow the UK model?
Posted on 20 January 2009 with no comments from readersOrder my book online from this link
The UAE decided to belatedly follow US interest rates lower yesterday, cutting its base rate by 50 basis points to one per cent. But so far there is no sign of a UK style bank bailout or any need for it.
Yesterday the UK prime minister Gordon Brown announced a second bailout package for UK banks which took the government’s stake in the Royal Bank of Scotland to 70 per cent, and created a mechanism for guaranteeing the value of bad debts on the banks’ books.
The UAE banking system is very different, partly because the emirates have always owned large stakes in their banks, and partly because the bad loan situation is nowhere near as severe as in the US or UK where house prices have been sinking, and continue to sink.
Property crash
In the UAE the property correction is relatively new, and only dates from October last year. There is evidence of very sharp property price falls but few actual sales at these levels, partly because so few completed freehold properties have been delivered and far fewer mortgaged.
Instead the more pressing issue for banks is the loan facilities granted to local property developers. As sales of new property has come to a halt the ability to service these loans becomes a problem, and will result in damaging write-offs for the banks, although the scale is unknown.
In the meantime, local banks can still see a pipeline of business from their traditional sources such as oil and gas, petrochemicals, telecoms and aviation. Yesterday Citi regional managing director Mohammed Al Shroogi told journalists ‘we have sufficient business but there are challenges’.
He told me the merger of Amlak Finance and Tamweel to create a home loan company with federal funding was to be welcomed as a consolidation in the sector. However, this union seems unlikely to have much market impact before the fourth quarter, and its exact mandate is unknown.
Bad loans
What does become apparent, all the same, looking at both the UK and US banking crises is that swift and effective action by the authorities is only possible if they know exactly what are the bad loan positions of individual banks.
In the UK case a condition for Treasury loan guarantees will be a signed statement from senior management coming clean about all bad loans, with the management held liable if more bad debt becomes apparent.
The UAE has the luxury of being a much smaller country, and the central bank may already have this information. If not then a lesson from the UK and US experience is that it should gather this data, although it may be difficult for UAE banks to separate good from bad loans at this early stage.
My guess is that the position of most of the UAE banks is much stronger than the wilder speculation, and stock market prices, suggest – but then nobody in their right mind invests on the basis of a guess, and setting the position straight would be the best solution to regain confidence and trust.
no Comments posted by readers:
Yeah, they should cut rates but they are a bit late to cut rates now. They should have cut them before these problems started. Cutting them now is pretty much useless. We saw how cutting rates in the US were like firing blanks. The UAE needs some very aggresive rate cuts now and they need to cut them big time.
I second Andy’s opinion, i think this rate cut is coming very late and 50 bps are not sufficient. The way the central bank handled this crisis was far from effective. They kept on cutting the rates earlier this year when the economy was overheating and hence fueling inflation. Loan growth spiraled beyond control. Now when the economy started showing clear signs of distress in Q4 08 they decided to maintain higher rates (vs. US fed rates).
Furthermore, the announcement in May/June that they will maintain the dollar peg and won’t even consider a revaluation resulted in a loss of almost AED 200 billion. Agreed, this was speculative “hot money” but everyone knew that there were substantial speculative funds in this region and the adverse repercussions of losing those funds. The crisis was very poorly managed over here!
I see less loans being given out now in Dubai with new rules taking place. These new rules will add to the falling real estate prices in Dubai as people won’t be able to get loans so easily. When buyers can’t get loans and sellers can’t afford payments then housing prices come crashing down really quick. The next few months will show this..
http://www.arabianbusiness.com/544560-uae-mortgage-salary-hikes-dangerous—online-poll
my dear sir you have hit this on the nail.With your small BIT of work on as bond prices sink,hold your gold,you have it in an EGG shell. Most folks are still looking for a long run for there money.That this is getting shorter bye(buy)or gone this not there direct concern.As most people live in a society that only knows debt as income ,or income as debt,we are living on time that has no solid finanical base. this will lead to rather nasty situations,which are there in the mirror to see.to be of a strong hand then there is only 1 exit,and it is to get back to the basics of thoughts and they were never maths of paper,but arithmetical places in time.as in 12 ,24 .365. and other lovly wordly numbers that basicly rule our world.yours r.b.
As thing get a little worst the major markets start to show HOPE, that we are sitting right in the middle of a major snowball ponzi is at the moment of no concern.History does repeat,its just goes to bed with different cloths on.IF one would compare this with the weimar thing,then we have gone over the top.At that time we here in europe went to war and the whole of europe want there war BONDS to WIN. sadly one party lost the game,which lead to hype bingo fiat and little hope.THE war that has now has been lost is your bank account -lock -stock- and barrel …to stop this is to get to a modern day solid payment system –stone age bronze age silver or gold.Q-how about an age of platium cos it hasnt been raped yet –honest –lol
so let us keep our socks on as we lose our soles and take a walk with in history ————–mh-ohme a-ha as has all ways been when the mass only think about there mass it beciomes a MESS -we have only one choice and this is going to be very painful—back to lying but honest debt that is based on something cos you dont or cant leverage in 1-2-100 or never ending noughts have you got GOLD
well as we see we went to water THIS hole fiat money system will pull more and more people in to the beleive that an ETF is real value…Its like getting the fish in the net ——TRUE freedom is in your FIST yours r.b.
SO THIS IS IT WE NOW PLAY ALL THE PAPER MONEY q IS WHAT COMES NEXT WAR WITH A DOUBLE W