x Abu Dhabi, UAEWednesday 24 January 2018

Central bank joins global rescue

UAE financial authorities follow those in Europe and Japan, but mortgage fears still remain.

Sultan bin Nasser Al Suwaidi of the UAE Central Bank has approved emergency measures along with his international counterparts.
Sultan bin Nasser Al Suwaidi of the UAE Central Bank has approved emergency measures along with his international counterparts.

The decision by the Central Bank of the UAE to provide a Dh50 billion (US$13.6bn) emergency lending facility to banks follows similar actions yesterday by financial authorities in Europe and Japan. The European Central Bank made $40bn available to banks andthe Bank of England lent $26bn, while Japan saw its first-ever dollar funding to financial institutions.

The Central Bank of the UAE was encouraged to act when international banks stopped lending and domestic banks struggled to make up the shortfall. Its actions have been widely welcomed in banking circles. "I'm glad they listened," said one foreign banker based in Dubai. Monica Malik, the director of economic research at EFG Hermes, said the central bank's decision should boost confidence in the sector.

"It means if the banks need funds, they are there, readily available," she said. But fears remain that this may not be enough. In particular, the property sector may be vulnerable. Analysts now believe the property market in the UAE will cool in the coming months, hurt not just by investor sentiment but by a lack of available credit. According to one industry source, a major bank in the country decided last week to withdraw from offering any mortgages.

Mortgage lenders will find short-term relief in the central bank's actions. According to Sharjel Hassan Vijdani, the second vice president and head of corporate credit at Habib Bank Zurich, the central bank's package is a relief for the mortgage finance pipeline. "Mortgage was a problem area," he said. "The growth in deposits is far below the growth in lending, especially in mortgage finance." Not only do developers need debt to finance their projects, but buyers need loans in the form of mortgages to buy the thousands of apartments coming on to the market, particularly in Dubai. In short, less credit means fewer mortgages, which translates into fewer sales.

Investors did not appear overly reassured by the central bank's decision. Tamweel's share price, which has lost about 40 per cent of its value in the past six months, declined by Dh0.2 to Dh3.99 yesterday. Amlak's shares, which have dropped 17.3 per cent in the past six months, shed Dh0.14 and closed at Dh3.62. Bank shares also lost ground. The mortgage market is increasingly important to Dubai and Abu Dhabi as they move from speculative sales - typically bought with small downpayments and resold quickly for a profit - to people who actually want to live in the buildings. If banks start to lend more cautiously, mortgage providers will follow suit.

Robert McKinnon, a property analyst and the head of equity research at Al Mal Capital, said the central bank's move was likely to be only a short-term solution to keep the UAE markets from going in the same direction as the troubled US economy. "In the long term if they continue like this, it potentially leads to more inflation in real estate values, which is of an even bigger concern," he said. "This is a temporary stopgap measure."

Mr McKinnon said that if mortgages became more pricey and banks more selective, the price growth of homes and apartments in Dubai would begin to slow within about two years. "It would put a cap on prices," he said. "Only the highest-quality buyers would be able to get mortgages. At some point it is going to be more difficult for the banks to fund real estate investments." Standard Chartered's economists agreed with the proposition that the central bank's relief package would be limited by concerns about inflation.

"With inflation running in double digits, there is a need for the central bank to contain credit growth," the economists wrote in a research note yesterday. "The authorities will have to ensure that there is enough liquidity in the system to keep the economy going, but at the same time bring down credit growth from 49 per cent to more sustainable levels. This will be a tough balancing act." Jean-Claude Trichet, the president of the European Central Bank, said: "Central banks are acting and appropriate decisions were taken in the supply of liquidity in our various currencies in order to be up to the exceptional period that we have. We remain alert, and everyone can see the central banks are alert."

The Bank of Japan announced its first dollar funding yesterday to more than 40 Japanese and foreign financial institutions. Authorities are making a last-ditch effort to put liquidity into the system to ensure that the financial markets do not grind to a halt. One banker even complained that there was too much money on offer. "At the moment we have got so many central banks flooding the market with liquidity and it is also difficult to find very quickly all the collateral that you need to post into these sorts of auctions," he said.

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