The United Arab Emirates is studying macro-prudential policies to regulate credit growth as the Arab world’s second-biggest economy is set to expand at the fastest rate since 2006.
One of the things “we are looking at is the ratio of credit growth versus GDP growth,” central bank Governor Sultan bin Nasser Al-Suwaidi said at a news conference in Abu Dhabi today. “This has been discussed for a long time, and is being discussed” with the International Monetary Fund.
The central bank is imposing borrowing curbs and tightening rules on loan-to-value ratios for mortgages to avoid a repeat of the 2008 credit bubble that helped cause the biggest economic slump in about two decades. The economy of the U.A.E., which holds about 6 percent of the world’s proven oil reserves, may grow 4.5 percent this year Economy Minister Sultan Al Mansoori said in September, the most in seven years.
The country’s currency peg to the U.S. dollar limits the central bank from using interest rates to target loan growth. The central bank hasn’t changed interest rates since February 2009, when it cut the repurchasing rate by 50 basis points to 1 percent.
The central bank will release revised limits for lenders’ exposure to government-related debt within a week in the official gazette, and the changes will take effect a month after publication, Suwaidi said. Banks will have five years to adjust at a rate of 20 percent per annum, he said.
“I think the rated bonds and sukuk will be excluded from the large exposure loan limits,” he said. Commercial, standalone government-related entities will also be excluded from the loan exposure limit, Suwaidi said.
The central bank in April 2012 said that banks must not lend more than 100 percent of their capital to local governments and the same amount to government-related entities to help reduce risk. There was no limit under previous rules.
The central bank is also working with banks to impose mortgage lending rules, setting a maximum length of a mortgage at 25 years. The value of a mortgage shouldn’t exceed eight years annual salary for an expatriate borrower and seven years for a U.A.E. national, according to the regulations.
While Suwaidi didn’t specify when the rules will be enforced, U.A.E. Banks Federation head Abdul Aziz Al Ghurair told reporters yesterday “it should be before the end of the year.”
Property prices in Abu Dhabi and Dubai, which account for more than 85 percent of the country’s gross domestic product, are surging. High-end villa prices in Dubai climbed about 32 percent so far this year, and those in Abu Dhabi 13 percent during the same period, according to Cluttons LLC data compiled by Bloomberg. Dubai and Abu Dhabi’s stock markets are among the world’s top 10 fastest-growing indexes this year.
“I don’t think its possible that there will be a bubble in the real estate sector,” Suwaidi said. “The mortgage law will balance the whole issue; it won’t permit banks to over extend themselves. We can sleep at night.”