x Abu Dhabi, UAEThursday 18 January 2018

Squeeze on personal debt is a risk to UAE growth

Greater transparency in consumer credit will be accompanied by a 'healthy' correction, writes The National's Business Editor.

A looming risk to economic growth in the UAE could be a second credit crunch - this time, however, it will be focused on personal debt. Warnings from eminent bankers like AbdulAziz Al Ghurair indicate that it is enough of a worry to be taken seriously.

Greater transparency in the consumer credit market will bring with it a "healthy" correction; essentially some people will no longer be able to get more loans once it is clear how much debt they already have. Right now an individual can hoover up credit from a number of different banks without any of them knowing how much is owed overall.

Once a true picture emerges - thanks to the new federal credit bureau - there will be a period of adjustment, possibly up to two years, as lenders take stock.

The impact is not expected to be dramatic, but it will not be insignificant.

While Central Bank data this week showed credit growth was at a not outrageous 9 per cent last year, compared to more than 40 per cent during the boom in 2008, the overall pie is much bigger and over the past 12 months we have witnessed record post-crisis levels of credit offered by banks to retail customers. Some banks are aggressively hunting for a greater share of a competitive market where margins are being squeezed. To give a sense to this, on an anecdotal level, I have been offered millions of dirhams of unsolicited, pre-approved debt in the past week alone.

Lucky for me I learnt a harsh but invaluable lesson in my twenties during the last great consumer credit glut around the time of the dot-com bubble of 2000. After accumulating tens of thousands of dollars in easy credit I discovered what happens when you cannot borrow any more to keep your head above water - it's not pretty.

However, it is still too easy to become complacent today.

Consumer spending in the UAE has already surpassed its 2008 peak, according to Euromonitor International and Nielsen says that the money is being spent on housing, leisure, hotels and health care. Confidence levels are robust regionally and globally, with Wall Street's Viv "fear" index at a seven-year low.

In the US, recent data paints a picture of a population addicted to spending beyond their means.

Up to now, there has been no indication that consumers are ready to rein their borrowing in any time soon. Perhaps they will take note of Mr Al Ghurair's comments before its too late?

More likely, they will follow the advice of Chuck Prince, the former Citigroup chief executive, who infamously said in 2007, that as long as the music is playing you have to keep dancing.


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