Credit crisis forces emergency moves by Saudi, UAE

RATE CUT: The Saudi central bank cut rates for the third time since October. (Getty Images)

Saudi Arabia slashed interest rates for an unprecedented third time since October and the UAE intervened in a property merger on Sunday in moves to contain the impact of the credit crunch.

The developments show how the global financial crisis has torn through the Arabian Peninsula, until recently thought immune due to massive sovereign savings and earnings from energy exports, with almost the same violence as in Europe and North America.

Saudi Arabia, the world's biggest oil exporter, reduced its key repurchase rate by 100 basis points to 3 percent to keep credit markets moving and boost domestic liquidity.

The kingdom's central bank also lowered reserve requirements to 7 percent from 10 percent, prompting one economist to say the two actions may mean the central bank has detected "serious slowdown signs especially in the private sector."

"[The central bank] is trying to stimulate the economy. There could be a slowdown coming from the credit area," said Muhammed Younas Malick, senior economist at the state-controlled National Commercial Bank in Jeddah.

A credit slowdown has already afflicted the UAE's property sector, which had enjoyed a five-year boom.

Lenders and developers in the UAE have been battered by the credit crisis as market financing evaporated, property values plunged and buyers fled a market where land values have soared.

On Sunday, the finance ministry announced that two of the UAE's largest mortgage lenders, already on track to merge, will be brought under a state-owned bank, in the first sign of federal intervention in Dubai's troubled real estate sector.

Trading in Amlak and Tamweel , which have been struggling due to the credit crunch, was suspended after the ministry said it would supervise their merger under the state's Real Estate Bank to ensure a fair valuation and protect shareholders.

A government body approved a merger that would combine Real Estate Bank with Emirates Industrial Bank, the official WAM news agency reported later on Sunday without giving details.

"For Amlak and Tamweel, it was always clear that some level of government support was necessary," said Raj Madha, a banking analyst at EFG-Hermes in Dubai.

"There were three problems that Amlak and Tamweel were facing: funding, liquidity and solvency. A merger between the two would have made no difference to those problems but an integration with Real Estate Bank effectively addresses all three of those issues," he told newswire Reuters.

The combined market value of the firms is 2.5 billion dirhams ($681 million) - roughly one third of their worth on Oct. 4 when the two Dubai-based firms first announced merger plans.

Little-known Real Estate Bank is a government-owned entity aimed at supporting the real estate sector and provide housing for UAE nationals, according to its website.

Earlier this month, Tamweel told Reuters it was in talks with the central bank and finance ministry about their "short-term requirements facility," and long-term funding options once its merger with Amlak had gone through.

A finance ministry official said on Sunday that more details would be announced in coming weeks while an Amlak official declined to comment. Tamweel was not immediately available.

Speculation has grown, as the financial crisis squeezes credit and hits stocks and real estate markets, that the federal government may step in to help shore up confidence in Dubai.

"Abu Dhabi, as the main backer of the UAE government, is lending its credibility to the Dubai real estate sector in a nutshell," said Eckart Woertz at Dubai-based think tank Gulf Research Center.

The UAE, the world's fifth-largest oil-exporter, is a seven-member federation that includes the Gulf trade and tourism hub of Dubai and is led by the emirate of Abu Dhabi, which is home to most of the country's oil.

Rasmala Investments Partner Eric Swats said the federal government's move seems aimed at securing access to central bank financing by changing the firms' status from mortgage lenders.

"This is not dissimilar to what the US government did when it granted Goldman Sachs and Morgan Stanley bank holding company status," he said.

UAE lenders have responded to the credit crisis by shutting off consumer credit to some clients and tightening conditions for mortgages in a move that threatens to choke off a five-year economic boom.

Becoming a licensed bank would enable the two mortgage lenders to take deposits and access emergency federal funds. Amlak, the biggest Islamic mortgage lender in the UAE, cut off new loans this month.

Amlak, an affiliate of major Dubai developer Emaar Properties, earlier this year renewed its application to convert into a bank, which would allow it to take deposits. (Reuters)

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READERS' COMMENTS

why did they not see this coming
Posted by Paul, Dubai, UAE on Monday 24 November 2008 at 13:29 UAE time

The thing I still cannot understand is how just a couple of months ago you had some notable investment banks predicting only a 10% drop in prices by 2010 owing to excess supply (no mention of credit crunch). Did these guys not notice what was ripping through the US, UK and Europe? Did they really believe the ridiculous Dubai hype that is was "special" and had bucketloads of money.

Did these banks and forecasters really not look under the carpet? Did they really not notice Dubai had billions and billions of debt all leveraged on real estate, something that had crashed everywhere else in the world and yet had risen faster than almost anywhere else in Dubai?

If these are the smartest people the banks can find, it is no wonder they are all going bust.

Credit Crises
Posted by arab on Monday 24 November 2008 at 06:39 UAE time

The worst is yet to come. This is the tip of the iceberg.

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