Dubai and the global bank­ing stresses of 2016

The Pak Banker - - COMPANIES/BOSS -

Even though oil and gas is a mere four per cent of the Dubai GDP, the emi­rate is the most net­worked, glob­ally in­te­grated, cap­i­tal flow sen­si­tive econ­omy in the Gulf, with trade, fi­nan­cial ser­vices, avi­a­tion and prop­erty/con­struc­tion at least 85 per cent of GDP. Dubai's re­silience to the global eco­nomic cy­cle was vin­di­cated dur­ing the 1998 Asian cri­sis, the post 9/11 decade and its role as a safe haven for off­shore wealth af­ter geopo­lit­i­cal trau­mas as var­ied as the col­lapse of the Soviet Union, civil wars in Le­banon and Iraq and the Arab Spring. This busi­ness cy­cle will prove no dif­fer­ent, though the Emi­rates NBD do­mes­tic eco­nomic tracker sug­gests the first cycli­cal pri­vate sec­tor con­trac­tion since 2009, led by the big chill in tourism, con­struc­tion and whole­sale/re­tail trades.

Even though oil and gas is a mere four per cent of the Dubai GDP, the emi­rate is the most net­worked, glob­ally in­te­grated, cap­i­tal flow sen­si­tive econ­omy in the Gulf, with trade, fi­nan­cial ser­vices, avi­a­tion and prop­erty/con­struc­tion at least 85 per cent of GDP. This makes it im­pos­si­ble for Dubai to be im­mune to the mood swings of Wall Street risk as­sets and the daisy chains of global money mar­kets as well as bank­ing loan growth at home.

Dubai's stock and prop­erty mar­kets are highly cor­re­lated to the global credit cy­cle, cross bor­der trade flows, the US dol­lar's strength (or weak­ness), oil prices and Fed­eral gov­ern­ment spend­ing. All these macro met­rics flashed a growth SOS to me since sum­mer 2014, as I ar­gued ad in­fini­tum in this col­umn when Emaar was Dh11 and prop­erty prices were 20 per cent higher. Then the bru­tal, Dar­winian logic of global macro took over. It is no longer pos­si­ble to gloss over tight money syn­drome and credit

the squeeze in bank­ing mar­kets. Bri­tish banks Stan­dard Char­tered, RBS, Bar­clays and HSBC, who once ac­counted for 70 per cent of cross-bor­der bank­ing flows into the UAE, have slashed their foot­print in the re­gion, due to dev­as­tat­ing losses in en­ergy/com­mod­ity loans in Europe/Asia and Basel Three cap­i­tal ad­e­quacy ra­tio pres­sures. RBS has ex­ited the UAE. Stan Chart has ex­isted SME lend­ing and axed hun­dreds of UAE based staff. Bar­clays laid off 150 bankers in its Emaar Square of­fice and HSBC plans to axe 50,000 staff mak­ing it the world's ex lo­cal bank.

As Abu Dhabi gov­ern­ment de­posits fell in 2015 due to the crash in oil prices, its flag­ship banks NBAD, ADCB, First Gulf and UNB were forced to re­duce loan growth to pre­serve UAE cen­tral bank man­dated loan/de­posit ra­tio. This led to stress in the in­ter­bank mar­ket, where the three month UAE dirham rate (Ei­bor) is now more than dou­ble the three month Li­bor, the bench­mark price of bank fund­ing in the Euro­mar­kets. The Fed in­sider's re­volt against Dr Yellen's dovish poli­cies makes a June Fed rate hike and a higher US dol­lar cer­tain in 2016. This means the cur­rent credit stress in the bank­ing sys­tem will con­tinue, as the cost of in­ter­bank fund­ing, trade finance, cor­po­rate loans and home mort­gages rises.

The lift­ing of sanc­tions in Iran has not revived bi­lat­eral trade flows. China's Peo­ple Bank must de­pre­ci­ate the yuan to re­vive the Mid­dle King­dom's econ­omy now that the big­gest credit bub­ble in his­tory has gone bust. This means Asian cur­ren­cies will also be un­der pres­sure (hence my short on the Sin­ga­pore dol­lar at 1.36 for a 1.50 tar­get!) and global air freight rates and con­tainer ship­ping rates will not rise. The Baltic Dry Freight index is 96 per cent be­low its pre-cri­sis peak, a vic­tim of trade's new Ice Age from China.

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