Dubai: The UAE and Qatar are benefiting from the flight of resources from trouble spots to safe havens and rising oil prices as a result of growing supply risks, according to Standard Chartered economists.
"Abu Dhabi and Qatar are benefiting from the surge in oil prices as a result of increased risk perception on the supply-side impact of the political turmoil in the region. Dubai on the other hand is benefiting due to its safe haven status. With more resources moving, sectors such as retail and hospitality are set to benefit," said Marios Maratheftis, the bank's Head of Research, Europe, Middle East, Africa and Americas.
Qualitative difference
Economists said yesterday that the regional resource flight to quality is reflected in the recent shifts in credit default swaps (CDS) or the cost of insuring the debts of Dubai and Abu Dhabi.
"In the initial stages of the political turmoil in Egypt, we saw the CDS of Dubai and Abu Dhabi widening, but in recent weeks we have seen them tightening, implying the qualitative difference with other regional credits. Dubai credit-default swaps dropped 5 basis points from Monday's close in London to 376, the lowest since November 2009. The emirate's credit risk had more than doubled that month to 655 as it sought an agreement to delay payment on Dubai World's debt.
Despite the likely inflow of deposits into the country, analysts said they do not expect any significant surge in bank lending in the UAE this year. "The banks continue to face tight liquidity situation as significant amount of money is still stuck in real estate and banks are still dependent on short-term deposits for liquidity," Maratheftis said.
Analysts said as the countries in the region continue to spend heavily on infrastructure.
They should develop local currency bond markets to fund these projects.
"Currently, a large number of infrastructure projects are funded through bank financing or foreign currency bond issues that are subject to international market conditions. The local currency debt market can mitigate such liquidity issues," said Dr Gerard Lyons, Chief Economist, Standard Chartered Group.
Currency basket urged
The Gulf region should eventually shift to a trade-weighted currency basket-based foreign exchange policy regime to replace the peg to the dollar, Standard Chartered economists said.
US monetary policy need not be always in sync with the market requirements of the GCC. In the past the region faced a combination of high liquidity, surging inflation and one-way bets on assets as US continued to cut interest rates.
"Central banks in the region should avoid the situation where a combination of low policy rates, high leverage and excess liquidity lead to asset bubbles. As long as the currency peg policy is followed, central banks should use macro prudential measures such as loans to value ratios and quantitative restrictions on loans," said Dr Gerard Lyons, Chief Economist, Standard Chartered Group. "Although inflation is not an immediate concern in the UAE and the Gulf region, central banks should keep an eye on fund flows and leverage and look at macro prudential measures."
