x Abu Dhabi, UAEWednesday 17 January 2018

End of uncertainty may spur lending

Agreement is likely to revive growth in the private sector and ease the flow of credit.

DUBAI // Dubai World's agreement in principle with creditors could help to kick-start growth in the private sector by easing the flow of bank credit. Banks in the UAE have been reluctant to lend to businesses since the Dubai Government-controlled conglomerate said last November it was seeking to restructure billions of dollars of debt. Uncertainty about whether lenders would be forced to accept a loss on their investment led to a reluctance to make corporate loans.

"As banks become able to draw a line under Dubai World they will start lending again," said Khatija Haque, an economist at Shuaa Capital. "We expect lending to improve by the end of the year if everything is wrapped up as risk aversion improves." The announcement comes as the latest data from the Central Bank suggested Dubai World had continued to weigh on the economy. The M3 money supply grew only 2.1 per cent last month from the same month last year, down from a 3.3 per cent rise in March. M3, the broadest measure of money circulating in the economy and an indicator of future inflation, edged up only 1.4 per cent in February, its slowest growth in at least nine years.

Bank credit declined to US$278.2 billion (Dh1.02 trillion) last month, from $278.24bn the month before. At the same time, banks set aside more provisions for non-performing loans. Provisioning climbed 4.7 per cent from the previous month to $9.8bn, the highest level since at least December 2008. The agreement in principle between Dubai World and its creditors was a "a major milestone", said Hamad Buamim, the director general of Dubai Chamber of Commerce and Industry.

"Now this major issue [of Dubai World] is resolved a lot of the risk has gone down to minimum," he said. "This will support the business community as the issue of financing and the cost of financing were two big issues on our agenda." With Dubai World seemingly close to concluding its debt restructuring, attention is now likely to turn to other government-controlled companies. Mr Buamim said the successful example of Dubai World could open the way for other state-owned companies, both in Dubai and Abu Dhabi, to reschedule debts in an orderly fashion.

Dubai Holding recently hired accounting firms to evaluate the financial health of two subsidiaries. "Since this one [Dubai World restructuring] has been resolved, we believe the others will go in a similar direction and they will be resolved, and before the end of 2010 the risk of Dubai will go down," said Mr Buamim. The restructuring of the government-controlled companies was cited by the Institute of International Finance (IIF) this week as being critical to Dubai avoiding a second year of recession.

Further financial support from the Federal Government and improvements in transparency were also required to ensure any growth this year, said the body, which represents international financial services companies. It estimates Dubai's debt totals $107bn, representing about 136 per cent of its GDP. Dubai World's agreement also may help spur inflows of foreign direct investment, as investors and private companies were cautious about investing while the conglomerate's debt issues were unresolved.

Despite the resolution, economists warn that imbalances in the emirate's property and financial sectors may still weigh on the its economy. @Email:tarnold@thenational.ae