Bank liquidity squeeze to restrict UAE growth in 2010

UAE banks are continuing to deal with the fallout from the recession and real estate crash, and are warning that the liquidity squeeze will add to the downward pressure on the local economy in 2010.

The debt standstill at the Dubai World state-owned conglomerate and the restructuring of its $22 billion loans hangs over the market with a resolution not expected until May at the earliest, and with the most likely outcome further provisions for local banks.

In the meantime the debt standstill means that the banks are not receiving interest payments on these huge loans. Then there is the mountain of other non-performing loans left over from the real estate crash and sudden-stopping of construction on an estimated 450 projects.

Tighter credit

The almost inevitable conclusion is that banks are going to lend less money and charge more for doing so as they focus on repairing their balance sheets and digesting bad debts left over from the boom years.

This is the reverse of the multiplier effect of credit on the economy in the boom period. Now de-leveraging will act as a impediment to growth which ought otherwise to be picking up as strongly as the oil price.

Of course the better news spin is that the fact that the sooner this process is over then the sooner growth can resume. That is going to give the UAE a head-start over most of the rest of the global economy which has not even acknowledged the need to deal with high debt levels yet.

At the opening of the Burj Khalifa, the world’s tallest building, this week His Highness Sheikh Mohammed bin Rashid Al Maktoum, Ruler of Dubai and Prime Minister of the UAE remarked that ‘we will see who comes out of this global recession first’.

Correct policy

And certainly if the UAE banks now take the pain and sort out their debts then that brings a true economic recovery closer, even if the immediate impact is to restrict growth in 2010.

But within the context of the equity assets of the UAE the debts of Dubai are a drop in the ocean. The UAE has oil reserves valued at $8.5 trillion at today’s oil price, and a sovereign wealth fund estimated to be worth anything up to $650 billion, compared with official Dubai debt levels of some $85 billion.

You could even argue that the Dubai debt crisis is a complete smokescreen hiding the world’s best per capita wealth, and that 2010 is a mere cash flow problem.