By Soren Billing
Morgan Stanley report says central bank move could help to free up funds for lenders.
Dubai’s $10 billion bonds sale to the UAE Central Bank could help ease the liquidity shortage that has prompted the nation’s lenders to hike the minimum salary required for getting a loan.
But the monetary impact of the central bank’s subscription to the bonds will depend on where the Dubai government decides to hold the funds, Morgan Stanley said in a research note issued on Wednesday.
The central bank currently requires loan to deposits, the ratio that decides how much banks need to hold in deposits in relation to their outstanding loans, to be around 100 percent.
This number currently stands at 113 percent, Morgan Stanley said, but could come down to 108 percent if Dubai places its bond issuance receipts with local banks.
“The effect on individual banks may be even more significant if these deposits were to be placed exclusively within Dubai based financial institutions,” said Mohamed Jaber, GCC economist at the investment bank.
But he added that the potential systemic risk of depositing those funds in domestic banks may deter the government from doing so.
“Given the debt refinancing needs of Dubai’s public entities, it is highly probable that the government will need to withdraw the majority of these funds over the next 12 months. This may indeed prove to be systemically risky if these funds were deposited within domestic financial institutions,” he said.
“Based on this, we believe that the funds will most likely be held outside domestic banks, with little net impact on domestic liquidity.”
Separately, Fitch on Wednesday described Dubai’s $20 billion bond programme as positive for the emirate’s government linked companies.
“This development confirms Fitch’s view that the UAE federal government is willing and has strong incentives to support Dubai in meeting its financial obligations and [in continuing] its development programme, due to Dubai's strong position and role within the UAE federation,” the ratings agency said in a statement.
The $10 billion cash injection by the UAE Central Bank to Dubai by buying five-year bonds at 4 per cent interest will help Dubaiâ€™s economy. Dubai is now better placed to handle its debts of $74 billion, almost the size of its GDP. Dubai will also be able to honour its $13 billion debt by the end of 2009. In the future, property speculation and rentals should be tightly monitored and controlled for the economy to perform well. In the past some people sold homes which were not even built. These homes were traded further, leading to unnecessary and unwarranted price escalations and speculations. This led to desperate anomalies of ten people living in a room in some localities, and entire buildings lying empty in others. The balancing of demand and supply and the type of properties required need precise management. It is important not to get carried away by marketing hype. The world is a much bigger place, than we realise. Dubai should also focus on the manufacturing and high-skill service sectors like software. There is no point in building high-price residential apartments, if there are no people to stay in them, or rich enough to buy them.