UAE expects inflation to dampen

Dubai: The UAE, the second-largest Arab economy, expects inflation to ease to 10 per cent this year from at least 11.1 per cent in 2007, a local Arabic newspaper reported on Friday.

The daily quoted Economy Minister Sultan Bin Saeed Al Mansouri as saying that inflation, which had been driven up by soaring commodities prices and weakness in the dollar, was expected to ease next year as oil prices fall.

The UAE, the world's fifth-largest oil exporter, pegs its dirham to the greenback, which had fallen for much of the year but has been rising in recent weeks.

Soaring oil prices, which had fuelled the UAE's rapid economic growth, have more than halved since hitting a high of almost $150 a barrel in July.

Inflation was expected to fall to nine per cent while economic growth, though dampened by falling oil revenues and the global economic crisis, would "remain high", the newspaper quoted Mansouri as saying.

In a similar vein, UAE Central Bank Governor Sultan Bin Nasser Al Suwaidi said at a conference in Frankfurt yesterday that "in the UAE we have ample resources to sustain a sustainable growth rate. We don't need high rates of economic growth. Our stable deposits growth rate is still at double digits and that's why we're able to meet credit requirements.

"Lower oil prices and tighter credit conditions will keep UAE growth lower in 2008 and in 2009, but it will be restarted by fiscal packages and oil revenue," he said.

Talking about the UAE's financial system, Al Suwaidi said: "We have seen massive outflows of funds in the UAE during the summer months. Banks in the major centres were impacted.

"The general pessimistic mood is still prevailing. The central bank of the UAE had to respond.

"At the moment. the UAE banking system is localising liabilities of banks. It's also repaying syndicated loans.

"We're also guarding our banks' credit portfolios.

"Globalisation of financial services will slow down as many restrictions will be put into place. In medium or smaller sized countries there will be tightening of regulation in general.''

Dollar peg to stay

Al Suwaidi said the region has no intention of unpegging its currency from the dollar despite the latter's appreciation in value recently.

"We were criticised for staying with the dollar when it was weak, so I don't think we should be criticised for staying with the dollar when it is strong."

He said the bank would "stay with the peg".

Commenting on the declining value of the property market in the region, he said banks would have to take extra provisions to cover the fall in value.

"In the economic downturn all sectors of the economy slow down by a certain degree and we have to take proper provisions at banks, and that is what we intend to do," he said.

He said he did not know yet what the volume of provisions would be.

"I don't know before we see how they develop into next year. We will take whatever downturn, whatever decline in value there is, we will take it into provisions.

"And because UAE banks are well capitalised, so we will have no problems to meet this extra provision," Al Suwaidi said.

Asked whether there is a danger Dubai sovereign debts would default, he said: "In terms of banking, I don't see any danger, we are willing to meet all the external debt of banks and we have absolutely no problem there.

"It's a matter of time. Whenever they mature, we will replace them and we intend to repay all of them.

He said when it comes to the external debt borrowings of banks, "we will have absolutely no problem in repaying, and we intend to repay" all outstanding amounts.