UAE can withstand liquidity crunch but growth may slow: S&P

October 9th, 2008 - 10:54 am ICT by IANS  

Dubai, Oct 9 (IANS) The United Arab Emirates (UAE) is likely to withstand the current liquidity crunch but economic growth may slow down, according to ratings agency Standard & Poor’s (S&P).In a new report titled “UAE Liquidity Squeeze Raises Questions Over Future Growth, But Credit Fundamentals Remain Sound”, S&P said UAE’s liquidity conditions are only tangentially linked to the global credit crunch and are mainly driven by domestic factors.

These include speculative investor activity surrounding the UAE dirham’s peg to the US dollar, rapid domestic growth in recent years and concerns over the real estate sector.

“While financing conditions are becoming more challenging, we don’t consider that the creditworthiness of rated domestic entities will be affected,” S&P credit analyst Farouk Soussa said in a statement after the release of the report.

“Refinancing risks will be contained, and the willingness and ability of the government to provide implicit or explicit support in the event of serious financial distress remains strong,” he added.

He, however, said if the liquidity crunch continues, growth is likely to be affected.

“If liquidity conditions remain tight, funding future projects will, however, become more difficult, thereby affecting the UAE economy’s hitherto extraordinary growth,” Soussa said.

According to the report, a cooling in growth would not necessarily be a bad thing as it could alleviate infrastructure and resource bottlenecks that had been stoking inflationary pressures, as well as reduce the risk of a significant oversupply in the real estate market.

Given the relative impotence of the central bank to control domestic monetary conditions in the context of the dollar peg, an exogenous tightening of liquidity conditions is a welcome development, it stated.

“If this (liquidity) tightening starts to bite too hard, we believe the UAE has the resources to ease liquidity constraints at short notice,” Soussa said.

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