StanChart forecasts UAE recession, monetary stimulus

Standard Chartered Bank’s respected economics team think the UAE will enter a shallow recession this year, and are more pessimistic about the outlook than the IMF and government forecasts.

The team also believes a $38 billion deposit should be made by the government in the UAE banking sector to ease a local liquidity crunch that has sent interest deposit rates as high as 7.5 per cent.

Net creditor

Regional head of research Marios Maratheftis told journalists today: ‘The UAE is structurally far better prepared for a recession than the UK or US because it is a net creditor nation with overseas assets more than canceling out its debts’.

He said Dubai should be regarded as part of the UAE federation and that its debts should not be considered in isolation. But nonetheless StanChart sees a recession in 2009.

‘First, consumption is falling with credit tightening and job losses. Second, investment is falling due to credit tightening, high interest rates and project cancellations. And third trade flows are contracting.’

Standard Chartered’s preferred prescription for these ailments is a $38 billion deposit in local banks to return their deposit-to-loan ratios below 100 per cent to allow them to start lending again.

Maratheftis explained that the UAE was a victim of its own success in expanding credit in the first half of last year which has been hard to finance in the wake of the credit crunch of the second half. Interest rates have been driven up by market forces to meet the liquidity requirements, and are now acting to accentuate the downturn.

Ease the squeeze

His argument is that the UAE Government has ample resources to raise deposits with local banks to ease this liquidity squeeze, and that it ought to be done as soon as possible.

However, he rejected suggestions from journalists that the UAE economy looked perilously exposed following the collapse of its construction boom, with half its sites now stopped and laborers being sent home by the thousand.

‘The UAE has assets which more than cover any liabilities, and is fairly unique in being a net creditor nation these days. This is a challenge for the authorities to sort out but the economy remains fundamentally strong.’