UAE: Crisis spawns loan defaults in once boomtown Dubai

[Naveed Yaseen]

DUBAI: The unthinkable is happening in once-booming Dubai where credit not many months ago was as easy as the lifestyle, the world financial crisis is spawning a rising number of loan defaulters.

And as jobs are slashed and liquidity dries up in the Gulf emirate, borrowing has become almost impossible, especially for items such as luxury cars, financial experts and traders say.

Thousands of job cuts have been announced in the emirate as companies pare staffing levels, while according to reports salaries of some highly paid executives have been slashed in half, reversing a six-year upward trend that had lured foreigners to the city in droves.

Prices in the real estate sector meanwhile have slumped by an average of 25 per cent from their peak in September after rallying 79 per cent in the 18 months to July 2008, according to global financial services firm Morgan Stanley. Haissam Arabi, chief executive officer of Gulf Mena Alternative Investments, paints a bleak picture. “The (credit) default rate has been on the rise with people losing their jobs and being over-leveraged,” he told AFP. “People are exposed to the real estate market,” he said, adding that some investors had been caught short after hoping to make quick profits from property deals.

“Some have been buying two or three properties, but now they have to pay back the developers,” he said. Dubai had in recent years embarked on extensive development projects, with real estate firms promising investors skyrocketing profits and mortgage lenders willingly opening up their coffers to borrowers.

But the global liquidity shortage has hit Dubai businesses hard and many employees have been laid off, prompting the surge in loan defaults and the strangulation of credit.

“Before, money was cheap and it was given to anyone who walked (through) the door, but today, with tight liquidity and high risk, banks are all of a sudden worried about who to extend loans to. There are questions about people’s ability to maintain their jobs,” Arabi said.

People working in sales, real estate and investment, the sectors particularly affected by the crisis, are among those struggling the most to secure loans, he added.

Bankers contacted by AFP declined to comment on the squeeze in credit and the central bank did not respond to requests for statistics. Raj Madha, a banking analyst at Cairo-based investment bank EFG-Hermes, confirmed that the numbers of non-performing loans have risen, but he could not provide a figure. He also confirmed that credit was hard to come by these days.

“With the credit cycle tightening, we know that (banks) are likely to pick and choose their customers very much more carefully than before. From an anecdotal point of view, we hear that individual banks are lowering credit limits on credit cards sharply, in some cases by 75 per cent,” Madha said.

“Mortgages are also becoming hard to come by, with many fewer banks offering services, and those services becoming sharply more expensive,” he added. “The rate of growth in mortgage loans has collapsed from well in excess of 50 per cent to a virtual standstill,” he said.

The percentage of expatriates versus nationals among defaulters is not clear, Arabi said. An indication of the scale of the defaulting are media reports, denied by the Dubai authorities, that around 3,000 cars were left at the airport as their expatriate owners fled the country and defaulted on their car loans. Car auctioneers say the volume of trade has increased since the crisis hit Dubai.

“We have definitely seen a rise in the number of cars auctioned off since the financial crisis has affected people’s ability to pay back loans,” said a worker for Golden Bell Auction, which holds a weekly auction on the outskirts of Dubai.

“There was an increase of between five to 10 per cent in the last couple of months in the number of cars being auctioned off. But we could not say what percentage are cars left by expatriates.”

A Dubai banker said that there were defaults on auto loans “as everybody had been buying cars.” “Most of the defaults are by expatriates who were forced to leave because of the panic situation. Some of the cars were luxury cars,” he told AFP requesting anonymity.

Latest figures show that the United Arab Emirates population stood at 6.4 million at the end of 2007, but that only 14 per cent were nationals. Dubai’s population was estimated at the time to be about two millions. Expatriates in the UAE mainly come from South and Southeast Asia, many of them low-paid workers. Hundreds of thousands of Arabs were also attracted by work opportunities, while Westerners were attracted by tax breaks and a potentially lavish lifestyle.

The UAE central bank and the finance ministry have together floated 120 billion UAE dirhams ($32.67 billion) of emergency funding since September to help banks deal with tight credit conditions. But banks have used little of these funds to boost liquidity in the market, said Arabi.

An auto dealer confirmed that banks have stopped giving loans to people wanting to buy luxury cars. “Unless it is someone important, the banks have halted all loans for luxury cars,” he said.

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