UAE

Claire Jones

Standard & Poor’s downgrade looks set to have little immediate impact on central bank reserve managers’ fondness for US Treasuries.

Despite China’s posturing, it – and others– look set to remain big holders of Treasuries for now. Japan – the second largest international holder of US debt after China – has said it thinks “there is no problem regarding the creditworthiness of US Treasuries and US government bonds will continue to be attractive assets.” Russian and Middle Eastern officials have said likewise. 

The United Arab Emirates plans to raise $2.7bn within a year of offering Sharia-compliant certificates of deposit. The deposits will be available from the UAE central bank by the end of the year, if all goes to plan.  Business Week reports:

The U.A.E. is working to pass a law establishing a federal debt market by the end of the year, central bank Governor Sultan bin Nasser al-Suwaidi said in March. That will enable the central bank to issue Treasury bills, bonds and Islamic notes. 

Banks are unable to lend as much as needed due to regulations on loan-to-deposit ratios, a senior banker said in Abu Dhabi yesterday. Banks need a liquidity injection from the central bank or a relaxation of the ratio requirement.

“The Central Bank has guaranteed all deposits,” Abu Dhabi Islamic Bank CEO Tirad Mahmoud told Gulf News. “So why do we pay 4 per cent [on deposits]: because we have to in order to meet the regulatory requirement.” 

Are banks a safer bet than government entities in the United Arab Emirates? Three pieces of news today suggest so.

First, the cost of insuring against sovereign Dubai default has shot past its November 2009 levels – i.e. when the Dubai World/Nakheel problems were afoot. 

The banks in the United Arab Emirates do not have any liquidity problems, but enjoy high liquidity and are not in need of additional support, the central bank governor said on Wednesday.

In remarks made on the sidelines of an opening ceremony of the Sharjah Islamic Bank’s new headquarters, Al Suwaidi also said the global economic crisis has stabilized to some extent, which reflected positively on the UAE, according to the official news agency WAM. “The economic growth in the UAE will not be enormous in the coming period and we will not have to talk about inflation as its rate will be very low,” he added. 

The Gulf is so much more exciting. Abu Dhabi today announced a $10bn injection to a fund for younger brother Dubai. The first action for the fund will be a $4.1bn payment of Nakheel sukuk obligations due today. No carefully timed, carefully worded press releases to minimise market shock: a slam dunk, last minute rescue. Phew!

Stocks around the world have risen, but S&P said it was unlikely they would raise ratings of the six government-related entities downgraded on December 2 (Bloomberg).

A summary of the support from Abu Dhabi and the UAE central bank: 

All eyes on Abu Dhabi: the focus has shifted from the health of companies to the relationships between emirates. On this, the consensus is that Dubai’s oil-rich, older, wiser brother may “ride, but not race” to the rescue. The UAE central bank has offered to make funds available, improving liquidity. But investors want more, ideally a debt guarantee: “This isn’t just a liquidity crisis, it’s a solvency crisis.”

It’s also a confidence crisis. 

The World Bank questions the supremacy of the United States, as other commentators question the legitimacy and usefulness of the World Bank. Bad news for ‘developed’ countries; good news for ‘emerging’ markets; and questions over the distinction between them