UAE economy could shrink in 2009: central bank governor

[LahoreEstate]

DUBAI: The United Arab Emirates economy will post low growth or even contract this year, its central bank governor said late on Tuesday, as the oil exporter suffered from a slump in energy prices and a property sector downturn.

The UAE was also finalising a plan to lower interest rates to stimulate lending but would not bring the price of money to zero, Sultan Nasser al-Suweidi said in separate remarks. “The current global financial crisis will reduce the horizon of economic growth of the UAE for 2009 from a growth level expressed through a high single digit figure to a low growth level or even a shrinking one,” Suweidi said in a speech delivered at an event in Abu Dhabi on Tuesday and posted on the central bank’s website on Wednesday.

Standard & Poor’s said on Tuesday the economy of Dubai, one of seven emirates in the UAE, could shrink 2-4 percent in real terms this year and many economists have said economic growth in the federation would slow to nearly zero this year. The UAE would maintain a policy of keeping official interest rates at low levels and credit and banking policy would focus on “guaranteeing reasonable credit expansion at low levels and a restricted banking expansion”, Suweidi said. In remarks published earlier on Wednesday, Suweidi said the UAE was finalising a plan to cut interest rates to boost lending but would not bring rates down to zero.

“We aim to introduce a low interest rate and maintain it,” Emirates Business (http://www.business24-7.ae) quoted Suweidi as saying. “The rate will not be zero, as is the case in the US.” “We have almost finished the plan and will announce the details soon ... It will help to stimulate the UAE’s economy.” Residential real estate prices in Dubai could slump almost 38 percent this year, a Reuters poll showed this week. Suweidi has said in recent months the UAE was working on plan to cut interest rates banks charge on corporate deposits. “We knew there was something that was brewing,” said economist Philippe Dauba-Pantanacce at Standard Chartered Bank.

Catalysts applied: The UAE lowered overnight repurchase rate by 50 basis points to 1 percent in January following a series of measures meant to shield the banking system and the economy from the crisis. A cut in benchmark rates might complement the central bank’s plan, Dauba-Pantanacce said.

“It might go to half a point (but) in terms of economic policy, it is more symbolic than anything else,” he said. “The transmission mechanism doesn’t work properly.” Banks have scrambled for enough liquidity to extend lending and have turned cautious toward borrowers, meaning they have not passed on lower rates into the real economy. Standard & Poor’s downgraded the credit ratings of seven Dubai firms and said it was worried about its banks’ health.

Suweidi said the plan included measures to protect the UAE’s banking sector from global stresses, including isolating it from certain financial instruments. This did not, however, mean that the UAE would consider dropping its peg to the dollar, he said. “When I said I wished to isolate our economic system from the global financial system I meant we should be isolated from dangerous tools on which our banks depended to finance the recent boom,” he was quoted as saying.

The one-month Emirates Interbank Offered Rate was quoted at 2.7750 percent on Wednesday, having fallen from levels above 4.4 percent in December, as the central bank slashed interest rates and introduced a dirham-dollar swap facility. The central bank and finance ministry have launched 120 billion dirhams ($32.67 billion) of funding facilities for banks since September to unlock credit markets. reuters

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