Local financial sector weathering the crisis

The recent sharp drop in international oil prices due to the global financial crisis will impact the UAE’s income from oil exports this year and slow its annual growth rate, but the emirates have enough resources to keep the local financial sector thriving for the foreseeable future, according to analysts.

Abu Dhabi and the other emirates have accumulated significant amounts of cash in recent years and have stepped up their investments abroad, giving them a cushion in today’s uncertain times. In mid-January this year, UAE Minister of Higher Education and Scientific Research H.E. Sheikh Nahyan bin Mubarak Al Nahyan announced in Abu Dhabi, “The government has made sure the development plans of the country will continue and that infrastructure projects are completed on schedule. Nothing has been cancelled because of the financial crisis.”

As the first market in the world to insure bank deposits, Abu Dhabi has a long history of protecting investors and will continue to do what it takes to keep its economy strong. As an example, the UAE central bank and finance ministry have set up USD 32.67 billion in emergency funding facilities to help them cope with the global credit crisis.

No plans to cut spending

In fact, at a mid-January meeting of Arab League central bank governors and finance ministers, some officials stated that government spending should be increased not reduced, in the current crisis. “If governments cut back on spending, they might make the economic slowdown worse,” said Giyas Gokkent, chief economist at the National Bank of Abu Dhabi (NBAD), the UAE’s second-biggest bank in assets. “Policy must be counter-cyclical,” he said.

Some investors in the Middle East are currently stepping up their financial-sector investments abroad and at home. Barclays, the UK’s second biggest bank, recently raised USD 5.69 billion through an investment by H.H. Sheikh Mansour bin Zayed Al Nahyan, a member of Abu Dhabi’s royal family.

Banks still investing abroad

Increasing investment abroad is, in fact, a pillar of Abu Dhabi’s Plan 2030, which states, “As Abu Dhabi and the UAE upgrade the capacities of supervision and regulation, and encourage the banking sector to improve its reach, opportunities will arise in foreign markets, and the emirate’s banks should be in a position to take them.”

Many local banks have already been following this advice. “As the economy and banks grow, it makes eminent sense to tap the avenues in other bigger countries with higher population. NBAD has been spreading its operations in many countries, like Oman, Sudan and Egypt,” noted NBAD’s Dr. Gokkent at the recent banking conference.

Meanwhile, Mubadala Development Company, an investment arm for Abu Dhabi’s government, will continue to invest in the UAE’s financial sector. Greg Fewer, Mubadala’s project and corporate finance adviser, commented at a recent financial-services forum, “We intend to tap the financial-services sector through partnerships with international players.”

Effects of global downturn

Nevertheless, the global financial crisis is taking its toll in the UAE. The average official selling price of Abu Dhabi National Oil Company (Adnoc) crude dropped to USD 40.96 a barrel in December following a high for the year of USD 135.68 a barrel in July. In December, UAE Central Bank Governor Sultan bin Nasser Al Suwaidi forecast that the UAE’s GDP would fall to single-digit level in 2009 due to the global financial crisis, and current projections are for 1 percent growth for the year, compared to the recent average of 5 percent.

UAE stock markets are reacting to the negative trends. In mid-January 2009, the Dubai Financial Market General Index sank to 3.22 percent, while the Abu Dhabi Securities Exchange Index dropped nearly 70 points, or 2.84 percent. Abu Dhabi’s Aldar Properties, Sorouh Real Estate and NBAD shares declined by 9.69 percent, 9.57 percent and 7.61 percent respectively in January.

Tackling the challenges

On the other hand, thanks to their oil resources and long-term strategies, Abu Dhabi and the other emirates are much better placed to cope with the challenges of a global financial slump than most economies are. Hussain Al Nowais, Chairman of Abu Dhabi Basic Industries (ADBIC), notes that he has lived through four previous economic crises in the Gulf region and that the UAE has always managed to recover very quickly. Recently commenting to journalists on the crisis, he said that the way to keep Abu Dhabi’s growth on track is to maintain high levels of public spending on projects designed to help diversify the economy. “Investors should be reassured that the government has clearly said we will continue to spend. This will not be an easy year, but I think we will manage,” he said.

Abu Dhabi’s tendency to spend cautiously in recent years has proved an advantage for the emirate: its developers have not exposed themselves to the risks that have recently caused problems for some of Dubai’s leading developers and mortgage lenders.

Trend toward consolidation

More consolidation is expected for the UAE financial-services sector. The financial crisis has already led to the merger of Dubai’s two largest home-finance providers under the umbrella of Emirates Development Bank – itself the result of another merger – and there will be more such mergers in the future, observers believe.

During a recent visit to Singapore, Al Nowais commented, “Consolidation will help to pool resources, cut costs and streamline. It has to happen, not just in the banking sector, but across the board. In any case, the fundamentals of Abu Dhabi’s economy are still strong, and there will be opportunities coming up for the wise investor.”

Plan 2030 still achievable

Over the longer term, most analysts are certain that Abu Dhabi’s development strategies outlined in Plan 2030 remain achievable. Under the leadership of President H.H. Sheikh Khalifa bin Zayed Al Nahyan, the government has been quick to manage the recent credit crisis, ensuring minimal repercussions to the national economy. To business leaders, Al Nowais said confidently, “In the face of the global economic slowdown, Abu Dhabi is still set to achieve satisfactory growth rates for this year and the years to come.”