The federal Government is ready to offer support to the UAE banking system in the unlikely event Europe's debt crisis widens into a full-blown credit crunch, says the Minister of Economy.
Europe's banking system showed new signs of stress yesterday as France, Belgium and Luxembourg were forced to nationalise Dexia Bank, the world's largest lender to municipal authorities. "Our exposure there is very small," Sultan Al Mansouri said yesterday, adding UAE institutions did not have large holdings of European sovereign debt. Still, a government committee was prepared to provide more aid for local banks in the unlikely event Europe's crisis spread, he said.
"[The support mechanisms] will always be there," he added.
The UAE's economy will grow by about 3.5 per cent this year despite the EU's woes, Mr Al Mansouri said at a World Economic Forum event in Abu Dhabi yesterday. "I would be very happy to see 4 per cent but, remember, we still have a couple months to go, so I would stay on the safe side," he said. The IMF expects the economy to grow by 3.3 per cent this year and 3.8 per cent next.
"The UAE took precautionary measures to make sure that exposure to these kinds of situations [such as in Europe] was not high," Mr Al Mansouri said. The Abu Dhabi Government injected Dh16 billion (US$4.35bn) into five local banks in February 2009. Last week the Central Bank's board said banks were "in a good position" and "should not be negatively impacted by the recent turmoil in international markets".
But while the UAE has taken steps to minimise exposure to Europe, Mr Al Mansouri gave a vote of confidence to leaders there scrambling to prevent a sovereign default by Greece and a return to recession.
"I don't believe that the leaders in the EU would let something like that happen," he said. "Neither will the leaders in the US allow something like that. They know now the size of the problems they have to handle and they also know and are discussing the process of how to address it and provide the right solution."
For the UAE, domestic issues were a more pressing challenge, Mr Al Mansouri said. The biggest question facing the country's economy this year and next, he said, was how to deal with the continued effects of the domestic property bubble on banks and the property market.
Prices have fallen by about half in some places since their peak in 2008, and banks are still suffering from growing provisions for bad loans.
"Probably the biggest challenge we have is the real estate issue and, 'are we coming to the end of this situation'?" Mr Al Mansouri said. "[The property sector] has taken a large chunk of our GDP and our banking [system]. That needs to be addressed in a much more systematic and constructive way."
If economic growth is to strengthen in future years, he said the UAE needed to go "back to basics" and focus on fully exploiting economic activity in sectors where it already has a large presence - trade, tourism and services. "The size of these kinds of activities can be much bigger," he said. "Some of them can be twice the size of what they are now. We need to go back to basics. We need to understand all the criteria that they require to ignite this kind of economy."
In Europe, stock markets rose yesterday while the euro strengthened against the dollar and yen. Despite months of concern about a surfeit of sovereign debts and a lack of credible plans to reduce them, confidence has recovered slightly in recent days.
Angela Merkel, the German chancellor, and Nicolas Sarkozy, the French president, agreed on the need to recapitalise banks and promised to address Greece's spiralling debt crisis before the Group of 20 leading and emerging economies meeting next month.
Better-than-expected jobs figures and economic growth data from the US have encouraged wary investors. But worries linger that Europe's debt disease could spread.
"At least we have started to see the policymakers being more active, although not quite proactive," Gary Dugan, the chief investment officer at Emirates NBD, said in a note to clients yesterday. "Given that the French and German governments are promising action ahead of the G20 meeting in November, a further rally in risk markets such as equities is possible. However, we fear the euro-zone policymakers will not deliver a sufficiently meaningful set of measures to satisfy the markets. Consequently any rally may be short lived."