The United Arab Emirates economy could contract this year due to the global slowdown, the economy minister said on Thursday, as signs mount the global financial crisis has hit Gulf oil producers harder than initially thought.
Neighbouring Kuwait, where the ruler dissolved parliament on Wednesday after the government resigned, could face a downgrade of its sovereign debt ratings as political instability places hurdles before a stimulus plan, Moodys Investors Service said.
Gulf policymakers had been reluctant to concede that the region, where economies boomed during a six-year oil price rally that ended last year, could witness economic contractions this year as oil prices slump and non-energy sectors face a slowdown. Echoing comments of the UAEs central bank governor, the economy minister of the worlds fifth-largest oil exporter said on Thursday the economy could shrink this year amid a crisis that has sent much of the industrialised world into recession.
"There could be some contraction... it depends on what happens in the world economy as a whole in the second half," Mansouri told reporters in Dubai, one of seven emirates in the UAE federation. "There is no way of predicting what will happen by the end of the year due to the situation in the world economy ... Id like to be conservative and say that the UAE will be affected by the slowdown in the world economy." "We are ready to address any kind of issues with regards to liquidity that may affect the economy of the UAE."
Former boomtown Dubai has suffered a sharp downturn in its property market, where prices could fall almost 40 percent this year according to a Reuters poll this week. Standard and Poors has said Dubais economy could shrink 2-4 percent in 2009. The UAE central bank and finance ministry have together launched 120 billion dirhams ($32.67 billion) worth of funding facilities for banks since September to unlock credit markets. The central bank bought $10 billion of Dubai government bonds to enable it help state-linked firms to meet obligations.
"Banks at the present time have stabilised," Mansouri said. "Liquidity from the government is available. It just depends on how we allocate it at the right time to the right entities." The UAE and other members of the Organisation of the Petroleum Exporting Countries have cut oil output since the autumn in an effort to shore up falling oil prices.
In a sign that the Gulf region would not escape the global crisis, Kuwaits government had to step in last year to rescue one of its largest lenders, Gulf Bank. Kuwait has sought to stabilise the financial sector and boost confidence and drafted a $5-billion rescue plan. But the plan requires final approval, and the parliaments dismissal has cast uncertainty about how the Gulf state will proceed.
"These events reflect an erosion of institutional strength which is of particular concern given the current challenges presented to Kuwait by the global economic and financial crisis," Moodys said on Thursday. Analysts think Kuwait may pass the plan by decree, bypassing tensions between cabinet and parliament.
That hope led Kuwaiti shares to rise for the fifth time in six trading days on Thursday. In the UAE, markets await word on the fate of troubled mortgage firms Amlak and Tamweel, which have been brought under a umbrella of the federal government. Mansouri said the two Dubai companies could still be merged. "I think it is one of the good options we are looking at," he said, adding that liquidation was not an option for now."