The financial crisis sweeping the world that emerged from Wall Street has taken its toll on the United Arab Emirates (UAE), sending the Gulf oil producing country's economy into an uncertain path.
DOWNTURN IN MARKETS
In the first half of 2008, the world saw a steady rise in oil prices, which climbed to a record high of 147.27 U.S. dollars a barrel on July 11. However, the soaring oil prices did not get a firm footing since then, with the supply and demand factors remained in a balance, as top officials of the oil cartel Organization of Petroleum Exporting Countries (OPEC) had said repeatedly.
After the speculative factors gave way to the fundamentals in the market, oil prices began a journey of correction, declining below 60 dollars a barrel, which represented a drop of more than 60 percent compared with the peak in July.
The decline of oil prices was no good news for the UAE, for the oil sector accounted for about 35.9 percent of the country's GDP in 2007. Local newspaper Gulf News estimated in July that the oil revenue of Abu Dhabi whose production accounts for nearly 94 percent of the UAE's crude oil output, would reach 100 billion dollars if the price remained on high level. But the figure seems impossible now.
In addition to oil prices, the UAE is facing a reverse in its property market which has been booming since the government allowed foreign investors to buy property on a freehold basis in 2002.
A report released by Morgan Stanley in August predicted a decline of 10 percent by 2010 in the property market of Dubai, the UAE's commercial and financial hub.
But the correction of prices in the UAE's property market came earlier than Morgan Stanley predicted. In November, HSBC said in are port that property prices fell in October by four percent in Dubai and five percent in Abu Dhabi, which is the first ever since2002 and may be a turning point of the six-year bull market.
In the stock markets, the UAE has been suffering a free fall this year, a similar experience that some emerging markets had during the same period.
On Nov. 16, the Dubai Financial Market (DFM) index closed at 1,981.44 points, falling by 68.51 percent from the year's peak of 6,291.87 points on Jan. 15 with a loss of 4.67 billion dirhams (1.27billion dollars) in market value.
On the same day, the Abu Dhabi Securities Exchange (ADX) also fell to its lowest point this year, with its general index hitting2,755.62, down 46.48 percent from 5,148.49 points on June 11 with a loss of 1.52 billion dirhams.
BANKS' TIGHTENING PURSE STRINGS
The UAE Central Bank held a meeting with representatives from all banks operating in the country on Sept. 18, three days after the U.S. investment bank Lehman Brothers filed for bankruptcy, to assess the status of the UAE banking system. A statement released by the Central Bank after the meeting said that the UAE banks had no exposure to Lehman Brothers and there was no systemic risk in the UAE.
But the statement also revealed that the country's banking system was also facing a lack of liquidity by saying that "various suggestions for boosting liquidity of banks were also discussed."
On Sept. 22, the Central Bank announced the establishment of an emergency lending facility worth 50 billion dirhams for banks operating in the country, marking the first move to inject liquidity since the Wall Street meltdown emerged.
After that, the UAE government took more steps to shore up the banking system. The Central Bank announced on Oct. 8 a two-percentage-point cut in its lending rate to 3 percent in a bid to boost liquidity of local banks. It also lowered the rate on its repurchase of certificate of deposit (REPO) from 2 percent to 1.5 percent with effect from Oct. 8.
In mid-October, the UAE cabinet said that it decided to take preventive measures to support the banking system. Under the measures, the government will provide a three-year guarantee to deposits and savings in all national banks and foreign banks with "significant operations" in the country. In addition, the government will also guarantee all inter-bank lending operations between banks operating in the country and inject sufficient liquidity in the financial system if and when necessary. The government also decided to inject another 70 billion dirhams into the banking system.
Despite the measures taken by the government, the lack of liquidity has made banks operating in the UAE tighten their purse strings. HSBC raised its minimum salary requirement for a personal loan from 5,000 dirhams to 10,000 dirhams in October and doubled it again in November to 20,000 dirhams.
Another major foreign bank operating in the UAE Lloyds TSB decided in November to stop lending to customers who wanted to buy apartments. In the meantime, the bank lowered its loan to value ratio on villas to 50 percent from 80 percent in October.
The UAE's national banks, including the country's largest bank Emirates NBD, were also reportedly tightening their credit.
UNCERTAIN PROSPECT OF MEGA PROJECTS
In the past few years, the UAE has witnessed a boom in its property market, with prices quadrupled. The property sector became an important contributor to the country's efforts to diversify its economy so as to reduce the dependence on the oil industry.
Property developers in the UAE launched a series of iconic projects during the boom, including the three Palm Islands and Burj Dubai, the highest architecture to date in the world. The success of those iconic projects in promoting themselves and their developers and the continuous upturn in the property market have encouraged developers float more mega projects.
In October, Nakheel, the developer of the Palm Islands, announced a new project named "Nakheel Harbor & Tower." The project, which will cover an area of more than 270 hectares and accommodate over 55,000 people, will include a tower more than 1,000 meters high. If completed, the Nakheel Tower will take Burj Dubai's title of the world's highest building, whose current height stands at 688 meters.
According to Nakheel, the Nakheel Harbor & Tower will take more than 10 years to complete. Now, with the credit squeeze and a possible bear market for the property sector, the project's fate seems uncertain.
In fact, Nakheel said in mid-November that it will reassess its “immediate business objectives to accommodate the current economic climate. ... The next few months will see a scaling back of activity around some of our projects."
Nakheel is not the only developer to reconsider its pace in the current unfavorable business climate. Limitless, which announced in October last year to invest 61 billion dollars to build a 75-kilometer canal and a waterfront development along its shores in Dubai, said in November that it was reviewing the pace of development "on a continuous basis" and would adjust to "reflect market conditions."
Emaar Properties, the developer of Burj Dubai and the largest property firm in the Gulf region by market value, said in the same month that it was reviewing its recruitment policy, sending out a signal to cut jobs to weather the current financial turmoil.
(Xinhua News Agency December 2, 2008)