"A real estate correction could happen, but UAE banks are cushioned... the banks are safe," Sultan Nasser al Suweidi, the central bank governor, said at a conference held by the Arab Monetary Fund in Abu Dhabi, the capital of the UAE.
The governor stressed that the domestic liquidity situation was improving and that the central bank stood ready to pump in even more capital into the banking system, but it is the first time a high-ranking government official has admitted that local real estate prices could fall.
Despite many warnings of corrections in recent years, property prices have continued to soar in the UAE, driven by booming economic growth, negative real interest rates, and a vast influx of expatriates.
Mr Suweidi also added credence to rumours of consolidation in the country's banking sector, which is crowded by more than 50 domestic and international commercial houses, many of them government-controlled.
"At this stage I'd say mergers are a very good choice for banks," Mr Suweidi told reporters on the sidelines of the conference. "[This is] not necessarily for weak banks but also for strong banks because mergers among strong banks will cut expenses and other administrative costs."
Several Gulf governments, including the UAE, have deposited billions of dollars in local banks and issued blanket deposit guarantees to ease a liquidity crunch and prop up economic growth.
The UAE, one of the hardest hit countries in the Gulf region due to the relatively openness of its economy, has made up to Dh120bn available to local banks, some as direct deposits and some as a credit facility at the central bank.
Of the Dh50bn available from the central bank, about 15 per cent, or Dh7.5bn ($2bn) had been tapped so far, Mr Suweidi said on Monday.
Concerns over the liquidity squeeze and a possible downturn in real estate markets across the region - particularly in ritzy Dubai - have exacerbated the slump of local equity markets. The MSCI Gulf index has lost nearly half its market capitalisation this year.
The two UAE bourses in Abu Dhabi and Dubai both fell on Monday, declining 5.80 per cent and 2.01 per cent respectively. Saudi Arabia, the region's biggest and most diverse stock market, slumped 5.0 per cent.
Oman's exchange was the region's worst performer, dropping 7.45 per cent, while Qatar fell 1.46 per cent and Bahrain declined 2.90 per cent.
Kuwait's stock market fell 2.22 per cent, as the central bank was forced to issue a blanket guarantee of all deposits, after Gulf Bank, the country's second-largest commercial bank, said it had lost money on a client currency derivatives trade.
The country "has recently faced mounting new challenges led by the current global turmoil and freezing international money markets," Brahim Razgallah, an economist at JPMorgan, wrote in a research note.
"Kuwait has a long history of bank deposits guarantee that well served the country to maintain confidence in the banking system after the financial crisis of the 1980s and the first Gulf War," he wrote in the note sent Monday.
Source - © The Financial Times Ltd 2008 [Monday, Oct 27, 2008]
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