UAE sticking with dollar peg, says central bank chief

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DOLLAR DECISION: Central bank governor Sultan Nasser Al-Suweidi says no plan to depeg from US dollar. (Getty Images)

UAE Central Bank Governor Sultan Nasser Al-Suweidi said the region has no intention of unpegging its currency from the US dollar despite the latter's appreciation in value recently.

Speaking on the sidelines of a banking congress in Frankfurt, he said: "We were criticised for staying with the dollar when it was weak, so I don't think we should be criticised for staying with the dollar when it is strong."

He said the bank would "stay with the peg".

Commenting on the declining value of the property market in the region, he said banks would have to take extra provisions to cover the fall in value.

"In the economic downturn all sectors of the economy slow down by a certain degree and we have to take proper provisions at banks, and that is what we intend to do," he said.

He said he did not know yet what the volume of provisions would be and would have to observe how the situation develops next year.

"I don't know before we see how they develop into next year. We will take whatever downturn, whatever decline in value there is, we will take it into provisions. And because UAE banks are well capitalised, so we will have no problems to meet this extra provision," Al-Suweidi said.

Asked whether there is a danger Dubai sovereign debts would default, he said: "In terms of banking, I don't see any danger, we are willing to meet all the external debt of banks and we have absolutely no problem there.

"It's a matter of time. Whenever they mature, we will replace them and we intend to repay all of them.

He said when it comes to the external debt borrowings of banks, "we will have absolutely no problem in repaying, and we intend to repay" all outstanding amounts.

Al-Suweidi said the interbank market is tight right now, but added it is not because credit is unavailable "but because rigidity has developed in the market out of fear of what will happen in the international global financial crisis."

"At the moment of course the situation is tight in the interbank (market) and of course that leads to banks, banks are not so freely lending but this is a shock situation. They are not lending at the same rates as before. That is quite natural at this point in time. It's the response of banks to the interbank squeeze of the interbank market."

The decision by mortgage lender Amlak to stop lending was part of this process.

"Everyody is very careful about lending at this point in time because there's a shock in the system, the interbank system," he said.

"All banks' lending are affected, all banks, because they have to decide what to do and they have to be very careful with the interbank market. When the interbank market is not working properly like anywhere else in the world, banks are careful in the lending."

He said he did not know how long the situation would continue. "I don't know, this is the one million dollar question."

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READERS' COMMENTS

You can't buck the markets
Posted by Monty on Friday 21 November 2008 at 20:00 UAE time

Ultimately the market is a very powerful thing. Trying to peg your currency to that of another country on the otherside of the planet with completely different financial circumstances is always destined to fail.

For years we've had the dirham peg keeping interest rates far too low which fed an property bubble that was already bloated to unprecedented size. Now the peg means that Dubai is absurdly expensive for the tourists and property purchasers Dubai expects to keep the debt riddled economy going.

It won't work. It never does.

The longer the peg stays in place, the more damage that is done... the more tourists who cannot afford to come here... the more companies that decide to close their offices and move somewhere cheaper (like London, New York or Tokyo). There is a global recession on - global companies will close the most expensive offices. International investors will stop lending to our banks.

Dubai is already heading for the mother of all economic collapses.

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