Despite possessing one of the world’s largest sovereign wealth funds as well as considerable oil reserves, the UAE is clearly not immune from the global economic crisis. Reports are that the UAE Central Bank anticipates that lending in the country in 2009 will increase by a maximum of 10 per cent, down from growth levels in excess of 50 per cent in mid-2008. In an attempt to soften this decline in credit growth, the UAE Central Bank and the Finance Ministry have made a total of AED 136 billion (US$37.03 billion) of funding available to banks since September 2008.
A first tranche of emergency funding was announced in September 2008. AED 50 billion (US$13.61 billion) was made available to banks operating in the UAE, with the aim of supplying capital to a large number of projects. A second tranche of AED 70 billion (US$19.06 billion) was subsequently announced in October 2008. In mid-March 2009, Abu Dhabi Commercial Bank, Emirates Islamic Bank, National Bank of Abu Dhabi and Mashreq Bank all announced that they would be converting some of these funds into Tier 2 capital in an attempt to improve their capital adequacy ratios. Exact details of the conversions are not currently available.
Guarantee deposits and savings
In addition to providing funding to banks, October 2008 also saw the UAE Government attempt to increase investor confidence in the banking system by agreeing to guarantee all deposits and savings with local banks. The guarantee is underwritten by Abu Dhabi’s wealth and its scope was subsequently extended to international banks with major operations in the UAE.
Additional funding Abu Dhabi
Following the announcement of the emergency funding packages, in February 2009 the UAE Government announced that it would inject a further AED 16 billion (US$4.36 billion) into five banks within the Emirate of Abu Dhabi. This will be provided as Tier 1 capital notes with a fixed interest rate of 6 per cent over five years.
The scheme will allow three banks – National Bank of Abu Dhabi, First Gulf Bank and Abu Dhabi Commercial Bank – to borrow AED 4 billion (US$1.09 billion) each and two banks - Union National Bank and the Abu Dhabi Islamic Bank – to borrow AED 2 billion (US$0.55 billion) each. Unlike the emergency funding, it is understood that the notes will operate in a way similar to the Government taking an equity stake in the banks. However, the funding scheme is such that the Government will not assume any more control over the operations of the individual banks.
The move is one which the Department of Finance states as a “strategic initiative” and “an appropriate and proactive response” to poor performance in the fourth quarter of 2008. As with the provision of guarantees over deposits and savings, the aim is to maintain confidence in the emirate’s financial institutions.
Later in February 2009, the Dubai Government announced that it would make available additional funding to support its economy. It will issue US$20 billion of unsecured bonds with a fixed interest rate of 4 per cent over five years. The first US$10 billion tranche of this is already fully subscribed by the Abu Dhabi-based UAE Central Bank.
In March 2009 it was announced that businesses would soon be able benefit from these funds. To do so, companies have to deal directly with the Dubai Finance Department. Funding will be then supplied following an assessment of each company’s needs, on a case-by-case basis. Negotiations will only be undertaken with larger companies and cash could be provided as extended loans or through banks. It is reported that small and medium-sized companies will be able to access funds through the Department of Economic Development. At the date of this article, a stimulus plan for these companies was due to be announced in the coming weeks.
Common Emergency Committee
Faced with slowing economic growth, the UAE Government is continuing to adopt an expansionary fiscal policy but it is taking steps to ring-fence its banking and financial system. In February 2009 it was reported that the UAE Ministry of Economy is to set up a Common Emergency Committee. The decision came at a meeting between the UAE Minister of Economy, Sultan bin Saeed Al Mansouri, and the heads of the country’s economic departments.
The newly proposed committee will comprise representatives of the Ministry of Economy, together with individuals from various economic departments, municipalities and the private sector. The committee’s main role will be to deal with the global economic crisis and it has been tasked with providing recommendations to the UAE Cabinet to achieve this. The committee will also assess the position of the real estate sector and address any potential issues.
In deciding to form the committee, it was emphasised that the UAE Central Bank must act to formulate effective monetary policies. Despite the country’s commitment to a free market policy, government intervention must be allowed wherever this is needed. Measures such as the provision of loans for strategic projects, regulation of leasing prices and stimulating growth in the industrial sector by making it easier to access credit were proposed. Further, it was suggested that the Ministry of Labour could release funds it holds as bank guarantees for private sector companies.
It was acknowledged that increasing the competitive stance of the country’s economy in the global market is vital. To this end, both governments and the private sector have been given roles to play. Governments of each emirate must support the real estate sector with effective strategies and policies and modify banking policies regarding interest rates and lending norms. At the same time, companies must ensure that there is transparency and accuracy of information release regarding their operations.
In a related move, Dubai had previously formed a panel of highprofile business figures, tasked with finding ways to deal with the current economic situation. However, the proposed UAE-wide committee will allow for a more coordinated approach to be taken across the country. The Minister of Economy hopes that this will protect the UAE markets from the worst of the global crisis.
The downturn in the real estate sector has prompted the UAE Government to become involved in the corporate restructuring of two of the country’s largest mortgage lenders, Amlak Finance and Tamweel. In November 2008, the Ministry of Finance announced that it had started the official process of merging the two under the government-owned Real Estate Bank. Following this announcement, trading in Amlak Finance and Tamweel was suspended and their assets were placed under review by a steering committee headed by the UAE Minister of Economy. The review was completed on 10 March 2009 and the committee presented the UAE Government with recommendations on the best way for the two companies to develop their businesses. While a merger is widely reported as the most likely option, it is understood that various other options have also been mooted. It is, however, understood that the possibility of liquidating the two companies has been discounted. The UAE Cabinet was due to finalise a decision shortly at the time of this article.
Further restructuring is also intended. In November 2008, the UAE Government approved the merger of the Real Estate Bank and Emirates Industrial Bank. This implements an earlier strategic decision by the UAE Cabinet and will create the Emirates Development Bank, which will have capital of AED 10 billion (US$2.72 billion). It is understood that the merger is being driven by a desire to maximise efficiency. The new bank will provide finance for small and medium-sized projects as well as financing several federal government projects, primarily housing projects for nationals. This is in line with the UAE Government’s policy of supporting the industrial sector and commercial real estate ventures will not be funded by the bank.
It is reported that financial and legal assessment of both banks has begun, with results to be referred to the Cabinet once the studies have been completed. Although the UAE Government will inject capital into the new entity and be the majority shareholder, the existing private sector involvement in Emirates Industrial Bank may be maintained. It is anticipated that the merger will be finalised in mid-to late-2009.
With the global recession continuing, further measures to stimulate the economy are inevitable. It is reported that the UAE Central Bank plans to announce further measures, which may include a cut in interest rates as well as restriction on inward and outward investment.
UAE Ministry of Economy has set up a Common Emergency Committee to deal with the global economic crisis and provide recommendations to the UAE Cabinet. The UAE authorities acknowledge that increasing the competitive stance of the country’s economy in the global market is vital.