Aftershock impact of financial crisis on manufacturing, financial and real estate sectors

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Business ownership structure in UAE differs from that in the Western countries. About 95 per cent of the local companies are small and medium-size family enterprises.

Qatar Airways - World's 5-star airline Most family enterprises operate in the trading sector and employs mostly family equity with much less dependency on international capital markets. Therefore, the impact of the financial crisis on family enterprises is assumed to be mild and might be limited to indirect impact through reduced global demand for re-export.

Manufacturing Sector

The manufacturing sector of UAE is also different, with economic structure young and very flexible. Particularly, Dubai is a commercial hub and not a production centre that requires huge long term funds.

Financial Sector

In the UAE’s financial sector, the banks, for which past government support has been crucial, and in many of them government co-own equity, have become serious international players, they have been profitable in the past and were able to grow remarkably, with presently huge reserves.

UAE banks are relatively less dependent on external financial markets. According to the UAE Central Bank, banks financing from the European Commercial Paper issues (ECP) and Medium-term notes (MTN) to total bank assets is not more than 9.9 per cent; for the interbank deposits percentage, it is 12.7 per cent to the total assets and most of these are owned by UAE banks.

Banks capital reserves present 11.02 per cent of bank assets, which is considered high according to Basel II standards. National banks and branches of foreign banks operating in the UAE are constructed on safe and sound foundations.

The Emirates Interbank Offered Rate (Eibor) increased due to liquidity reduction brought about by significant liquidity withdrawal by speculators after the government decided not to revalue the dirham, and as response to similar international developments and international revaluation of risks.

An increased Eibor means that UAE banks are facing a serious credit crunch locally.

The fact that much less than 10 per cent of the Central Bank  emergency facility has been applied for so far is explained by reluctant banks not willing to express their liquidity needs and their fear of losing reputation.

It goes without saying that a high Eibor is a remedy against bad loans and it will go hand in hand with international market development taking international risks into consideration. In brief, there are sufficient facilities being put in place to allow banks to resolve their problems.

Real estate sector

Demand still seems to be exceeding supply. In the worst case scenario, due to the liquidity crunch we may see a reduced demand and a softening of real estate prices.

If more supply will emerge from real estate hoarding by speculators and developers seeking liquidity, the gap between demand and supply might be reduced even further. However, as the level of real estate hoarding is so far unknown, it is difficult to predict the eventual impacts.

Stabilization of prices will reduce the number of new real estate development and if liquidity dries up further it won’t be a lucrative sector for speculators any more.

If the impact of the financial crunch in the real estate becomes visible, there might be a sort of dual real estate market developing, meaning that a dual market may develop to consist of two heterogeneous sectors:
(1) a constructed sector, which generates rent,
(2) an off-plan sector which is still in the planning or under construction phase.
Slight risks maight be expected for the first sector, which could emerge from the reduction in real estate hoarding of which the level is unknown, but there are some risks of a liquidity crunch for the second sector.

If no new liquidity will enter the latter segment, there will be many postponements and or cancellation of development projects.

If that happens to the second sector, this will depend on the pace of price stabilization and the decrease in future supply in terms of time it takes to slow down and the magnitude of price adjustment.

The UAE economy has proven in the past to be able to successfully face several financial crises. The secret is the young and dynamic economy with a very high degree of flexibility.

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