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UAE 'must inject $30bn into banks'

Dubai, February 16, 2009

The United Arab Emirates needs to move quickly to inject about 110 billion dirhams ($29.95 billion) in deposits to banks to restore lending or face the brunt of a severe global downturn, a bank has warned.

UAE gross domestic product is set to contract by 0.5-1.5 percent in the first half of the year before returning to growth in the second half, only if authorities act quickly, said Marios Maratheftis, Standard Chartered's regional head of research.

"In the UAE, even though fiscal policy is expansionary and the authorities are working hard to improve liquidity conditions, monetary policy is tight," Maratheftis said in a study presented at an economic briefing on Monday.

Credit availability in the UAE is shrinking even as the economy suffers as over-extended banks hoard deposits, Maratheftis said.

Banks in the UAE have become more cautious as the property sector faces and downturn. Lenders have posted sharp declines in fourth-quarter profit and some have reported losses as they book provisions for bad loans and write down investments.

Hoping to defrost credit markets, the Gulf state's finance ministry last year launched a 70 billion dirham emergency faclity to improve liquidity in the banking system. The central bank also launched a 50 billion dirham facility.

One-month EBOR, the Emirates Interbank Offered Rate, was 3.10625 percent on Monday.

"If we see EBOR rates falling further it is not necessarily a sign that things have improved, it is a sign that liquidity is trapped," Maratheftis said.

He added that the UAE should boost spending on infrastructure, including schools, roads and hospitals, and return to its original economic diversification plan, while putting real estate-driven growth of recent years on the backburner. - Reuters




Tags: UAE | credit crunch | cash |

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