In what is being described as an unprecedented move, the United Arab Emirates' Central Bank is putting $13.6 billion of emergency funding into its domestic money market. The money will be used to drive down the cost of lending between local banks, which has shot up as credit from international lenders evaporates.
'In this oil-rich region, liquidity has long been taken for granted, and has been used to finance a massive property boom. The Central Bank's move highlights the breadth of the credit crisis, and shows that the emerging markets of the Middle East no longer consider themselves immune from US turmoil,' said Jeremy Glansome, an analyst with New York firm Global Property.
He described it as a sharp departure for the UAE from past monetary policy that held that such a sudden injection of liquidity into its domestic money market would drive up inflation, which ran into double digits last year.
In Dubai analysts said a change of tact was necessary to avoid the risk of a property market slowdown, which would have devastating effects in the region, where the demand for loans at Emirati banks have outstripped the pace of deposits.
'This is effectively the first time that the central bank has something like a discount window,' said Ahmed el Shali, chief financial officer at Dubai Bank. 'It is totally new to their modus operandi.'
The new money will be made available to Emirati banks through a credit facility to ensure that growth continues. The central bank went so far as to suggest it would top up the fund if needed, saying other resources could be tapped 'for providing further support to banks operating in the UAE if required.'
The announcement echoes similar actions by the Federal Reserve and the European Central Bank to buffer against fallout from the credit crisis.
'These funds are going to help. Everyone needs money. There is a massive shortfall,' said Jason Goff, head of treasury sales at Emirates NBD.
There has been concern that the Gulf's property boom makes it particularly vulnerable to a credit crunch, with massive development projects funded largely through loans, and housing often bought and sold on speculation.
