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Crunch time
Many analysts predicted a loosening of credit restrictions in the first quarter of 2009. However, that relief has yet to come as the liquidity crisis shows no signs of abating.
During the first nine months of last year, UAE banks acted as if the credit crunch would never come. Lenders advertised cheap money on giant hoardings above packed mega-malls, borrowers gorged themselves on gargantuan loans and multiple credit cards, and rock-bottom interest rates coupled with a booming economy meant the Gulf seemed a million miles away from the doubt and uncertainty that was choking Western markets.
Now, though, those days are over and the UAE faces a liquidity crisis of unprecedented proportions. With loan to deposit ratios at exorbitant levels, many banks are over-leveraged and a lack of funds means they are reluctant to lend to each other.
Would-be home buyers are unable to get a mortgage, while smaller businesses - including developers now running into cashflow problems - are suffering as lines of credit dry up.
Many analysts expected banks to loosen their lending restrictions at the beginning of 2009, with the dawn of the new financial year. And with banks across the country confirming they have received the second tranche ($6.8bn) of the $32.6bn emergency government funding designed to boost liquidity, the pressure is on lenders to ease credit lines
However, experts now say that the financial shackles are unlikely to come off as soon as was hoped.
"I don't think for the foreseeable future, in the next three to six months, things will improve on the bank lending front. I think liquidity will remain under pressure," warns Raj Madha, analyst at Egyptian investment bank EFG-Hermes in Dubai.
The origins of the current liquidity crisis can be traced back to the early part of last year, when foreign money poured into the country on investor bets that the dirham would be revalued against the dollar. When the revaluation talk proved to be a false alarm, the inflows of foreign capital reversed. The exodus of foreign money was then exacerbated by investors fleeing the turbulent equity markets.
With the interbank lending market frozen, shockwaves from the global recession are rocking the Gulf. House prices are falling, developers are cancelling or delaying projects, and there have been widespread job cuts across the real estate and construction sectors - two of the biggest drivers of GDP growth in the UAE.
The confidence of both lenders and borrowers has been rocked, and banks' frugal lending policies are unlikely to change until there is reassurance that loans will be repaid. According to a study published last week by global consultants Dun & Bradstreet (D&B), 55 percent of SMEs are unable to get the credit they require, and over 50 percent of SMEs are unhappy with the interest rates they are being charged.
The study showed that banks in the UAE generally reject between 50 to 70 percent of the applications for credit to SMEs, largely due to high perceived risk of lending in the country.
Madha believes the labour market holds the key to the prospects of an easing in liquidity conditions.
"The health of the labour market affects banks' willingness to lend, as banks are happier when they know they are going to get their money back," he says. "The risk is that borrowers are potential skips [someone who flees a country without repaying debts]. Redundancies in finance, property - and at some stage in the tourism sector - mean the probability of skips has risen."
At the end of September the UAE Central Bank unveiled plans to pump $13.6bn into the banking system. Three weeks later, an extra $19bn liquidity injection was announced.
Most analysts support the government's intervention, and believe the cash pumped into the system will filter through eventually. However, will it be enough?
"We need more in the way of bailouts," says Marios Maratheftis, head of research at Standard Chartered bank. "Liquidity has definitely tightened; it is going to be a long time before we go back to the days of free credit. Those days are over."
"A liquidity injection is not designed to bring about a return to a loose monetary environment," agrees Madha at EFG-Hermes. "They may plausibly be topping up the $33bn in the second half if they find that credit markets have not eased to the extent expected."
The scale of the liquidity problem and the snowballing international financial crisis was highlighted in November, when it emerged government-owned Real Estate Bank would absorb Amlak and Tamweel, the two biggest mortgage lenders in the UAE with a combined market share of 60 percent.
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