Dubai: The UAE economy in general and Dubai in particular will gain maximum benefit from capital flows resulting from the second round of quantitative easing, popularly known as QE2, according to economists and bankers.
Quantitative easing is a way of pumping money into the economy by central banks to encourage banks to lend. The US Federal Reserve is expected to announce a new round of monetary easing later today.
In the context of the weak private sector credit growth in the UAE and the Gulf Cooperation Council (GCC) region analysts say the new liquidity boost from quantitative easing will increase access to international funding.
Credit growth
"While a common theme has been a continued disappointment in private sector credit growth, particularly in the UAE, Kuwait and Saudi Arabia, an important thread going forward seems to be potential increased access to external funding," said Turker Hamzaoglu, an economist with Bank of America Merrill Lynch.
The new surge in liq-uidity with international banks and fund managers is expected to result in increased demand for bond issues from the region. "This [quantitative easing] should have most positive impact on Dubai. However, as the demand for MENA credit is not growing as fast as the global peers, the issuance supply should become a major driver of performance in the region," said Hamzaoglu.
Investment bankers and fund managers say Gulf entities have nearly $100 billion (Dh367 billion) in debts maturing over the next 18 to 24 months. This is a clear window of opportunity to refinance the short maturity debts with long term funding.
"The fresh dose of liquidity in the market is going to breathe life into the demand side of the Gulf fixed income market. We are likely to see more issuance from the region," said Nadi Bargouti, managing director of Shuaa Asset management.
Analysts say the Fed's new round of QE is likely to support the GCC recovery, even to a much lesser extent than the rest of the emerging markets through five channels, namely a weaker dollar; lower interest rates; higher commodity prices; higher asset prices and access to cheap and abundant capital.
The global backdrop for the MENA markets has largely turned positive lately with the weaker dollar, falling short-term real interest rates, higher oil prices, improved risk appetite and cheaper and more abundant external funding.
Weaker transmission
"The positive spillover from quantitative easing is less pronounced for the region compared to the rest of the emerging markets due to their weaker transmission mechanisms," said Jean Michel Saliba, an economist with Bank of America Merrill Lynch.
GCC historically lags the business cycle of global emerging markets, given it remains a major oil exporter that has somewhat limited, domestic absorption capacity. Also, GCC markets are relatively more closed than their emerging market peers with some barriers to foreign capital and foreign ownership of assets.
