x Abu Dhabi, UAEMonday 22 January 2018

Six steps to stem the Emirati credit crunch

I find myself inclined to write about the effect of the economic crisis on the UAE and the various ways in which the UAE can react.

I find myself inclined to write about the effect of the economic crisis on the UAE and the various ways in which the UAE can react. As discussed two weeks ago, some measures have already been taken. However, I believe that six additional steps must be taken immediately, to safeguard the economy's sustainability as a whole. A large number of people have bought property off-plan on which they cannot continue to make payments as per their agreed schedule, nor can they get a mortgage against those properties; in addition there are reports that some of this real estate is trading below the price they paid to developers. So an incredible number of properties are about to be defaulted on, which in turn will harm the economy in many ways - from bankrupt companies who will have to lay off their staff, to investors losing their equity: all of which will lead to a significant decline in national consumer spending.

First, and most obvious, is for all of the master developers to freeze their new, unannounced projects. Thankfully this seems well under way because of a recognition on the developers' part that demand is weak and supply needs to be stimulated again. In addition, the governments of Dubai and Abu Dhabi have pledged to coordinate all future projects to ensure that they are in line with market requirements.

Second, recently announced projects that are still largely in the off-plan or early development phase should be redrawn and scaled down as much as possible to reflect what has been sold already; this, too, would decrease supply. Again, I hear that this is being considered, although no formal announcements have been made yet. Third, delays have been a fact in the past and they will only increase now: so master developers must reorganise payment plans in line with construction milestones instead of random time periods. That way, cash flow within the economy makes more sense and liquidity flows cyclically without pausing at developers' bank accounts.

Fourth, the Emirates Development Bank, born last month out of the recapitalised merger of the Emirates Industrial Bank and Real Estate Bank together with Tamweel and Amlak Finance, must begin to offer mortgages immediately. This is imperative considering how increasingly coy local and international banks have become in providing financing for property over the past two months. In addition to providing primary mortgages to end users directly, it must also provide secondary funding to other banks by way of buying their existing mortgages in securitised form. This will allow these banks to loosen the ratio of mortgages to assets, eventually allowing them to provide financing to individuals and corporations again. In that sense it will mirror the important role that Fannie Mae played during the Great Depression - and Freddie Mac did later on - in the United States. Their purpose is to purchase and securitise mortgages to ensure that funds are consistently available to the institutions that lend money to home buyers.

Fifth, various investment agencies, to be led by the recently formed Emirates Investment Authority, together with local private sector funds, must create fixed prices for non-liquid properties and allow buyers an exit opportunity at a fair price relative to current market conditions, but also relative to the prices they paid. Sixth, and most important, interest rates need to be cut to lower the effective cost of borrowing and to encourage affordable borrowing. This is most pressing when comparing the five-year US swap rate, which is at 2.5 per cent, and that of the UAE, which is at 3.4 per cent: and the six-month EIBOR of 4.39 per cent needs to be cut in line with the six-month LIBOR, which is at 2.55 per cent. The reason for this is that if you were to apply for a mortgage in the US and in the UAE and were in good financial standing, you would be charged a lot more here than there. With regard to the argument against this and in favour of high interest rates to attract deposits into the system: we have already provided complete guarantees for all deposits nationwide and so do not need further concessions. Nowhere is safer than the UAE considering the far-reaching repercussions of this cisis. The rates need to be cut, and they need to be cut fast.

The coordination of all the above initiatives will not only have the direct effect of creating liquidity in the market, though a worthy target on its own. It will also achieve a much more important goal, which is restoring people's confidence in the market and convincing the various stakeholders that a UAE Inc exists, not only Dubai Inc or Abu Dhabi Inc, that is aware of the challenges ahead and is able and willing to react with the right tools at its disposal.

Happy National Day, and may these troubled times serve in retrospect as lessons learnt along the way in forging the UAE into the Emirateropolis that I dream it will one day be. Mishaal al Gergawi is a graduate of the American University in Dubai and the CERAM European School of Business