The United Arab Emirates is poised for two years of slow economic growth as the Gulf state's property sector is hit by the global financial crisis and banks rein in expansion, the central bank governor said on Thursday. Growth in gross domestic product (GDP) in the world's fifth-largest oil exporter would fall to low-single-digit levels in 2009 and 2010, Sultan Nasser Al-Suweidi said, as an economic boom spurred by six years of high oil prices comes to a close. Still, a slump in the Gulf state's booming property sector would be limited as the oil producer continues to adopt an expansionary fiscal policy, although the country would take steps to ring-fence its banking system, Suweidi said. “The present global financial crisis will reduce the prospects for the UAE economic growth from high single-digit to low single-digit growth in 2009 and 2010,” Suweidi said at a banking conference here. “Monetary policy in the UAE was and still (is) expansionary and aimed at maintaining balanced economic growth.” UAE economic growth will fall by more than half in 2009 to 3.1 percent from 7.5 percent this year on lower oil output and slowing consumer spending, EFG-Hermes said on Thursday. While he did not pin down a specific growth rate, Suweidi said the UAE's real estate sector - one of the engine's of non-oil sector growth - faced pressures from slowing demand. “The real estate sector is to be affected,” Suweidi said. “But we must understand that this sector is very rigid and behaves somewhat differently from stock markets due to the fact that a large part of the sector is owned by single and wealthy individual landlords who can weather very high vacancy rates.” Tourism would also slow and force hotels to cut room rates, he warned. An influx of foreign investors fuelled a vigorous surge in property prices but it is now starting to reverse. House prices in the emirate of Dubai are likely to fall almost 28 percent from a peak earlier this year as a sharp downturn in demand puts the brakes on a six-year property boom, a Reuters survey showed this month. However a ‘significant' slowdown in inflation would help sustain a construction sector boom, while trade would continue to grow spurred by local and regional demand, Suweidi said. “Construction ... will not slow down significantly as government departments will find prices attractive enough to undertake major public infrastructure projects.” After years of massively expanding credit growth to support a regional boom, UAE banking policy would now “emphasize reasonable but low rate of credit expansion and restricted banking expansion,” Suweidi said. The UAE would restrict some practices to ensure it could not be dragged into future crises, he said, adding the central bank was examining bank lending to see if there was any need to provide extra provisions. “The banking regulatory policy response that we are contemplating in the UAE will be slightly ring fencing or insulating our financial system,” Suweidi said. While trade-related transfers would continue “without much restriction,” the country would place “some restrictions on some investment flows both outward and inward because risks have been clearly noticed in investments.” Banks, meanwhile, were in the process of repaying foreign debts, including medium-term notes (MTNs) and interbank deposits, because “local liabilities are more manageable,” Suweidi added. The central bank and finance ministry have together launched AED120 billion worth of emergency funding since September to help the banking system cope with tight credit markets.
