The growing scale of the crisis afflicting the global banking industry has thrown a spotlight on the financing needs of the country and particularly the renewal of a large stock of short-term debt held by Dubai. Few doubt that the UAE has the means to refinance its debts and carry out its long-term expansion plans from its reserves, if needed, but the liquidity crisis has caused some to worry that international banks may be unwilling to renew some US$20 billion (Dh73.47bn) they have lent to the Dubai Government and its companies. That in turn could slow economic growth, which is founded to some extent on a burgeoning property market heavily dependent on borrowed money. "People are worried whether the big Dubai names will be able to roll over their debt, especially those who are related to real estate," said Ibrahim Masood, a senior investment officer at Mashreqbank in Dubai. "Given the level of growth we've seen, there must have been a large amount of funding raised to fuel that growth, and the funding is not of an indefinite maturity. The credit prices for guys like Dubai Holdings are so high right now, that people are beginning to take a serious look at whether the those guys will be able to roll over the debt when it reaches maturity," he said. According to Eckart Woertz, an economist at the Gulf Research Center in Dubai, "Commercial lending is becoming more expensive and less available. The UAE is vulnerable to a liquidity squeeze, especially Dubai and its real estate sector," he said. Farouk Soussa, a credit analyst at Standard and Poor's, a rating agency, said the government may be using the liquidity squeeze to cool off the economy and rein in excessive lending. Loans grew by 31 per cent in the first half of 2008, compared to a 13 per cent growth in deposits, according to Merrill Lynch. "I call it a 'luxury liquidity crunch'", Mr Soussa said. "In this case it's helpful for the government to tolerate a moderate liquidity shortage, so long as it doesn't go too far and undermine confidence in the solvency of the system." According to Mr Soussa, the government has more than enough extra money stored offshore in sovereign wealth funds to ease even a serious liquidity squeeze at home. Bringing some of it on shore, however, risks stoking already strong inflationary pressures. Were the money shortage to reach a point where large Government-related bodies such as DP World and Nakheel could not refinance their debt, the UAE government would almost certainly come to their rescue with the necessary cash, he said. However, in the meantime, the Government will likely be content to see some new projects put on hold for lack of funding. The liquidity shortage has already put a damper on project finance, when banks provide financing for large infrastructure and industrial projects, whose revenue stream is then used to pay off the loan. Until recently, project finance was a popular way to fund large industrial initiatives, including oil extraction facilities. Now, banks are charging a much higher rate for such loans, often making them prohibitively expensive. In the past two years, the number of banks actively seeking project finance deals has declined by around 75 per cent, according to London-based industry sources. The turmoil has also caused some to speculate that more emergency measures from GCC central banks may be in the offing, intended to bolster the as-yet ineffective actions several of them took last week. Nine day ago the Central Bank of the UAE announced an emergency lending facility designed to inject Dh50 billion (US$13.6bn) into the local money markets. No bank has yet come forward and made public its use of the facility. However, the action failed to stem a steady rise in interbank lending rates. Yesterday, the central bank of Kuwait began extending loans to Kuwaiti banks. Saudi Arabia also signalled last week that they were ready to inject extra money into the market, if necessary. The Emirates Interbank Lending rate climbed to 4.19 per cent ? the highest since January ? before Gulf markets closed for the week on Monday. According to Giyas Gokkent, an economist at the National Bank of Abu Dhabi, the rates need to fall back to around two or three per cent before things return to normal, and that will require further action. "I would urge the central bank to cut the reserve requirement," he said. Cutting reserve requirements is equivalent to injecting cash into the money market, because banks can lend out money that was previously frozen in the central bank vaults. email@example.com
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