Tis the season to be jolly... Forget for now financial folly... Zero now for interest passes... Just hope the Fed can save our assets. The malls are decked with boughs of holly, and that means it's time to get into the spirit of things, look beyond the economic gloom and summon if we can the ghost of boom times past. Admittedly, it's going to be a blue Christmas for many as job losses rise and asset prices fall. And as those reduced to window shopping already know, commercial banks are playing the Grinch this year.
They've been slashing credit card limits, they've cut lending for homes. They've stopped funding new projects and kiboshed car loans. But respite may come in the new year, bankers say, when something called window dressing starts to give way. Many banks use the calendar year for calculating the health of their balance sheets, so they are apparently rushing to raise cash to close out the year. When January arrives, they'll be able to ease up and consider new loans.
That won't mean they'll be generous - the global credit crunch isn't going away. The Dh120 billion (US$32.67bn) in liquidity measures the Central Bank and Government have devised so far, moreover, have done little to improve things because of the conditions attached. Any bank availing itself of the Central Bank's Dh50bn facility can use the funds only for existing commitments. Any new financing has to be funded from new deposits, which banks are still battling each other to acquire, if rising deposit rates are any indication.
The Government's Dh70bn in long-term deposits can be lent only to finance trade or ensure the completion of existing projects. That means no new low or medium-income housing to offset the surfeit of luxury villas and condominiums coming on to the market. Moreover, the Central Bank's facility enables banks to borrow back only the money they are normally required to deposit with it. The Government's deposits, on the other hand, carry a predetermined interest rate. For banks, lending for anything other than government-backed securities, which pay an equivalent or higher rate of interest, would be too risky.
Still, convincing banks to lend again is not a problem unique to the UAE. Banks everywhere appear too shell-shocked to do little more than sit back and collect the interest on their government bailout funds. Other governments, therefore, are falling over themselves to lavish taxpayers with the gift of fiscal stimulus. Anyone expecting the UAE to do the same at Tuesday's meeting of the Federal National Council would have been disappointed.
The Government instead reinforced its guarantee on bank deposits. While this is good for depositors and for confidence, it appears - in the absence of fiscal stimulus - contractionary. It stands to encourage greater savings without encouraging lending, private investment or consumer spending. Banks in the UAE do need deposits, but they don't face the crisis of confidence that struck banks abroad, mired in toxic assets.
Not yet anyway. At the moment they suffer from a lack of capital thanks to the short, sharp shock created by the withdrawal of overseas credit. This sudden evaporation of global liquidity is causing goofy things to happen in financial markets, forcing prices down much further than justified by even the gloomiest economic outlook. Unless the end of days is upon us, analysts say, most assets are underpriced.
Note to investors: just because assets are underpriced doesn't mean they can't continue to go down in value. The continued deleveraging of global financial institutions and investors continues. As a great economist once noted, the market can stay irrational longer than you can stay solvent. Last week's column discussed the oddity of investors willing to lend money to the US for no interest. It also noted that corporate borrowing costs have risen to the highest level since the Great Depression, and that it now costs less to insure many companies'' debt against default than it does for those companies to borrow.
Something weird is also happening in emerging markets. The prices that emerging market borrowers must pay international lenders is rising, which is consistent with a pessimistic view on the region's outlook. But for the past two weeks funds have simultaneously been trickling back into developing stock markets. China received a particularly strong inflow, despite a drumbeat of increasingly negative news about its economy.
Commodities exporters such as the Gulf and Russia have not benefited as much, largely because their key export, oil, is falling and pegged currencies prevent them from taking advantage of cheaper prices for their other sources of foreign currency, such as hotel rooms or port charges. Some analysts dismiss the emerging markets' stock rally as another form of window dressing. Many country-related funds are required to hold a certain percentage of their assets in stocks, so after having sold stocks for cash to limit losses, they are now buying back those stocks before the year ends.
But others say the divergence between borrowing costs and stock prices is part of an emerging trend. Borrowing costs may be higher than the risk of default would indicate, but lending is decidedly out of fashion. Stocks, on the other hand, are re-emerging as an alternative to cash in a world where governments are printing money to pay for bailouts and economic stimulus. Emerging markets offer a particularly compelling case, analysts say. With low levels of debt compared with the West, the emerging markets of Asia and the Middle East stand to gain much more from any new government largesse.
While China is combating its own slowdown with lower interest rates and the world's largest stimulus package, however, the Central Bank here has indicated that it will not cut interest rates. And the Government has yet to disclose a fiscal stimulus plan of its own. 'Tis the season? Fa la la la la, la la bah humbug. email@example.com