Resurgent U.A.E. Ponders Steps to Prevent Crash Rerun

Five years after the United Arab Emirates began its steepest economic slump in two decades, a rebound has left policy makers pondering ways to avert a recurrence of the overheating that turned boom into bust.

Boxed in by a currency peg that rules out using interest rates to regulate credit flows, the nation’s central bank plans to impose some borrowing curbs and tighten rules on mortgage approvals, according to the chairman of the U.A.E. Banks Federation, Abdul Aziz Al Ghurair. It will also set up a credit bureau to control lending.

The period preceding the U.A.E.’s slowdown “is remembered as being a real-estate cycle,” Simon Williams, the Dubai-based chief Middle East economist at HSBC Holdings Plc, said in an interview Oct. 8. “That’s not all it was. It was also a credit cycle, and it will be the readiness of policy makers to curb the pace of credit growth that will determine how successful they are in avoiding a repeat.”

The nation’s domestic output grew 4.4 percent in 2012, the most since it surged 9.8 percent in 2006, according to preliminary government data. Expansion may reach 4.5 percent this year, Economy Minister Sultan Al Mansoori said last month.

Property markets, meanwhile, are surging, with prices for high-end villas in Dubai climbing about 30 percent, and those in Abu Dhabi 13 percent this year, 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.

“Dubai has oxygenated blood running through its veins for the first time in the past five years,” Williams said. “If you can’t control credit by targeting its price, you need to aim for the volumes.”

Debt Rules

Under the central bank’s new mortgage lending rules to come into force before the end of the year, banks won’t be able to finance third homes bought by expatriates, and mortgages will be limited to the equivalent of seven years’ income for an expatriate, and eight years for a U.A.E. citizen, banks’ federation chief Al Ghurair said last month.

The central bank also plans to revise limits for lenders’ exposure to government-related debt in the next two months, Al Ghurair said. The U.A.E. central bank said in April 2012 that banks must not lend more than 100 percent of their capital to local administrations or government-related entities, to help reduce risk. There was no limit under previous rules.

Airport Footfalls

In further signals of the economy’s strength, passenger traffic at Dubai’s airport climbed 24 percent to a record 6 million people in August compared with the same period last year. Abu Dhabi’s terminal had a record number of passengers the same month, according to data compiled by Bloomberg.

Dubai borrowed more than $110 billion to transform itself into a commercial and tourism hub. Developers relied on bank lending and advance sales of unbuilt properties to propel the world’s fastest-growing real-estate market before 2008. Then came the crash.

Dubai received a $20 billion handout from neighboring Abu Dhabi to help avert defaulting on debt in 2009. That year, both Dubai and Abu Dhabi’s economies contracted, as property prices slumped more than 50 percent from their peak.

Domestic output in the U.A.E., which consists of seven sheikhdoms, declined 4.8 percent in 2009, government data show. That was the most since a 19 percent contraction in 1986, according to International Monetary Fund data.

Oil Reserves

The economies of Dubai and Abu Dhabi, which make up more than 85 percent of the U.A.E.’s gross domestic product, have since rebounded. Dubai’s gross domestic product grew 4.4 percent in 2012, the fastest pace in five years, while Abu Dhabi’s economy expanded 5.6 percent, according to the latest government data. Abu Dhabi is home to about 6 percent of the world’s proven oil reserves.

The central bank hasn’t changed interest rates since February 2009, when it reduced the repurchasing rate by 50 basis points to 1 percent. Contacted by phone yesterday, the bank’s public relations manager said the official authorized to comment on rate changes wasn’t available for an interview.

“Because the U.A.E. has an exchange-rate peg, they effectively outsourced their monetary policy to the U.S.,” Giyas Gokkent, chief economist at National Bank of Abu Dhabi PJSC, said by telephone. There are so-called macroprudential tools it can use to help regulate the market, Gokkent said.

The U.A.E. is setting up a national credit bureau, which will work as a buffer for banks, Gokkent said. The bureau expects to fully operational in 2015.

Property Fees

“Without a credit bureau, lenders don’t really have a good grasp of the credit worthiness of a borrower,” Gokkent said Oct. 6 by phone. “A borrower could’ve gotten financing from a number of banks and then you get problems with over indebtedness and servicing of debt.”

Dubai has also doubled property-registration fees in a bid to discourage speculators from entering the market and inflating prices.

The Dubai Land Department raised the transaction fee to 4 percent from 2 percent effective Oct. 6, Director General Sultan Bin Mejren said Sept. 26. The change will apply to residential and commercial properties, including those sold before they are built, he said.

“I see the increase in the real-estate fee as a signal of intent,” Williams, the HSBC economist, said. “But if policy makers are serious about curbing the pace of growth, that can only be a first measure. The key thing is the readiness to control credit growth.”

(Corrects Abu Dhabi property price increase in the fifth paragraph of story originally published Oct. 10.)
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