Will the new UAE central bank governor twist monetary policy? . . . . . . . . . . . . After remaining as a central bank governor since 1991, Sultan bin Nasser Al-Suwaidi, a decree by UAE President Sheikh Khalifa bin Zayed al Nahyan named Mubarak Rashid Al Mansouri as the new governor. Despite his critical role in dealing with the tumultuous times that hit the UAE economy since the aftermath of the 2008 global financial crisis, Al-Suwaidi had received a goodbye letter after his long-serving period. In fact, the new governor is at mid-40s, the country is looking for fresh blood to lead the central bank with the beginning of a new era, following the debt crisis that hit Dubai in 2009-2010. A new way of thinking is, perhaps, needed to move the second-biggest Arab economy into a new prosperous phase. Change in monetary policy The key question that comes in mind after this step is whether there will be a change in the UAE monetary policy in the coming period amid the internal and external challenges facing the economy. Some analysts see that there will be no major change since the dirham is pegged to the U.S. dollar, so the whole matter is in the hands of the Federal Reserve. However, the Fed is heading to a change in its monetary policy as it will probably withdraw all its bond purchases by October and may start hiking interest rates early next year. But what is the effect of such tightening by the Fed on the UAE economy? While the low interest rates at major economies, led by the United States, has poured more money into emerging economies, a rise in borrowing costs is likely to return investments back the world’s biggest economy. Accordingly, this will weigh on the foreign investments that are supposed to come to the UAE amid the large spending by the government on new mega projects, especially in the real estate. For instance, the value of announced and planned construction projects in the UAE is set to reach $315 billion this year. The change in the Fed’s monetary policy may also take a toll on Dubai and Abu Dhabi bourses, as the low interest provided by banks have prompted investors to look for higher yield in the equity markets, pushing it to record high. Hence, with the rise in interest rates once again, the cost of borrowing by companies will be higher and therefore they will become reluctant to borrow from banks, which will eventually weigh on corporate profits. Dow Jones, for instance, has climbed to a new peak this month, a record 17,299 points, but faced some downside pressure with announcement of the Fed of more tightening in the coming period. Following the same suit, Dubai’s benchmark index has advanced 52 percent this year, to become the world’s second-best performer, while Abu Dhabi gauge has surged 19 percent. Challenges Perhaps the key challenge that will face the new central bank governor is the rising inflation, as it may have a negative impact on household spending and thereby growth. Data released this week showed that the main inflation gauge, the consumer price index, rose to 2.42 percent in the year ended August from the prior of 2.33 percent. On the monthly basis, the reading climbed 0.43 percent from 0.09 percent in July. The key driver to the annual rise is the 2.9 percent increase in housing and utility costs, which accounts for nearly 40 percent of consumer spending in the country. What`s Next? Probably, Al Mansouri will work on imposing firmer restrictions on bank lending, especially to the real estate and GREs (government related entities). There must be stricter rules to regulate the process of lending to avoid giving loans to high-risk individuals, given the fact the some banks are still reeling from large loan provisions. In general, Al Mansouri may discuss the option of the borrowing limit offered to banks since lenders are allowed to provide loans up to 90 percent of depositors’ money. The central bank may also continue to restrict mortgage cash after making a cap on home loans to expatriates by 75 percent of the property value and 80 percent for nationals. Despite the current boom in the real estate sector and the banking to finance the construction sector amid the UAE plans to host the 2020 World Expo, it seems that the central bank will be aware of avoiding having bad real estate loans, similiar to what happened to local banks during the global financial crisis. Finally, Standard and Poor’s predicts to see tighter limits on bank lending to GREs and local governments, as many banks have experienced a setback because of the high exposure to the GREs. Already, regulators have put a limit of lending to GREs at 100 percent of its capital base, which took effect in 2013, where lenders were allowed to a five-year period to fully adopt the new rules. #egyptyard
Posted on: Thu, 25 Sep 2014 13:15:42 +0000
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