x Abu Dhabi, UAEFriday 21 July 2017

Euro crisis may 'rattle' Emirates

Euro Zone: Fallout from the debt crisis in Europe would ripple through the UAE economy, warns the Middle East director for banks at Fitch Ratings.

George Papandreou, the Greek prime minister, has held emergency talks with Nicolas Sarkozy and Angela Merkel ahead of the G20 summit in Cannes. AFP
George Papandreou, the Greek prime minister, has held emergency talks with Nicolas Sarkozy and Angela Merkel ahead of the G20 summit in Cannes. AFP

Fallout from the euro-zone debt crisis will ripple through the UAE economy, says the Middle East director for banks at Fitch Ratings.

His warning comes as world leaders from the Group of 20 gather today in Cannes, France, for perhaps the most important summit in the organisation's history.

Despite the possibility of Greece rejecting the latest EU benefit package, the summit of the Group of 20 leading and emerging economies (G20) will look to agree on a deal on the country's debts and ensure the financial consequences of a Greek no vote are not felt throughout Europe and the rest of world.

And Mahin Dissanayake, at Fitch Ratings, said the UAE and its banks could not avoid being affected by decisions made at the G20 on the euro zone.

"We do not agree with some of the statements being made that the UAE will be immune from issues in the euro zone and globally," said Mr Dissanayake. "We believe a further, and possibly protracted, downturn in the global economy could affect the UAE economy and therefore the banking sector."

A funding squeeze at banks is also likely to affect lending to businesses, he said.

"There's a clear link between tourism, services, manufacturing and trading segments, in particular Dubai, with what's happening globally. As a result, we believe the banks will be affected in terms of growth, asset quality and earnings. It's as simple as that," said Mr Dissanayake.

Yesterday ahead of the summit, George Papandreou, the Greek prime minister, held emergency talks with Nicolas Sarkozy, the French president, and Angela Merkel, the German chancellor.

Mr Papandreou stunned world markets earlier this week by calling for a referendum on a deal tocut the country's debts.

A euro-zone agreement had been made to write off half of Greece's bank debts, increase the size of a recently established European bailout fund and recapitalise banks. But the Greek people are expected to vote against the deal in a referendum that could be held within weeks.

Stock markets fell sharply around the world after the referendum call but stabilised somewhat yesterday ahead of the G20 meeting, which it is hoped will dispel some of the uncertainty created by the Greek announcement.

However, figures released yesterday in Germany showed that unemployment rose unexpectedly last month for the first time in more than two years and manufacturing contracted in Europe's largest economy. In addition, the final Markit Euro-zone Manufacturing Purchasing Managers' Index for last month fell to 47. 1, revised down from a preliminary reading of 47.3 and down from 48.5 in September. The survey suggests the crisis is putting a chokehold on euro-zone business and adds pressure on the European Central Bank to cut interest rates.

"It makes grim reading," said Alan Clarke, an economist at Scotia Capital. "If there was any doubt t the euro zone was headed for recession, these data should confirm it."

Despite the uncertainty in the EU, business leaders in the Middle East expect little effect from a renewed recession in Europe.

"I would be confident that if Europe went into recession we would not feel the impact here," said Gerald Lawless, the executive chairman of Jumeirah Group. "Our tourism numbers continue to increase and we always find other markets if one is peaking and slowing down."

Tourists from the UK are Jumeirah's biggest source of revenue, followed by visitors from Russia and Germany, Mr Lawless said.

Despite this, he said, the UAE's establishment as a global aviation hub would ensure Jumeirah's business would continue to be strong.

"We are very confident, without being complacent, and looking for new business as well as looking after current customers," said Mr Lawless. Rafic Fakih, the managing director for Emirates Fast Food, which owns and runs McDonald's 90 franchises in the UAE, also believes there will be little impact from decisions made at the G20 meeting.

"For retail, the risk in the UAE is not high, we do not see huge consequences," he said. "The only issue might be if banks here have relationships with European banks."

One of the key points likely to be made clear at the G20 summit is the size of the European Financial Stability Facility (EFSF), which is expected to be increased to about €1 trillion (Dh5.06tn)

The EFSF had to postpone a bond issuance of €3bn yesterday due to turbulence in the debt markets.

In afternoon trading, Germany's DAX was up 1.27 per cent, France's CAC 40 had increased 1.14 per cent and the Eurostoxx 50 had edged 0.88 per cent higher.

In the UAE, the Dubai Financial Market General Index closed down 0.38 per cent at 1,377.48 and the Abu Dhabi Securities Exchange General Index closed down 0.25 per cent at 2,490.17.

rjones@thenational.ae

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