The credit crunch has changed the lending habits of banks in Abu Dhabi, just as it has affected banking institutions around the world. In 2007, Abu Dhabi’s 28 international banks and 23 local banks lent more than $200bn between them. But 2008 and 2009 are set to be far leaner years, a topic that dominated the banking and finance sessions of MEED’s Abu Dhabi conference.

The main difficulty is a lack of liquidity in the financial markets, with banks wary of lending to each other out of a fear that anyone they lend to may not be able to repay the debt.

“Even between banks, you don’t know who to trust,” Sameh al-Qubaisi, head of institutional and corporate coverage at the National Bank of Abu Dhabi, the second-largest bank in the UAE, told delegates at the conference on 10 November.

The situation has not been helped by the flows of money controlled by speculators. In recent months, those who had been betting heavily on a revaluation of the UAE dirham earlier in the year have been withdrawing their money as it becomes clear that the Central Bank of the UAE is determined to stick to the existing rate against the dollar.

“In the UAE, you have a very tight liquidity situation in dirhams,” Jeremy Parrish, chief executive officer (CEO) of Standard Chartered Bank in Abu Dhabi and Al-Ain, told the conference.

“It is actually quite difficult today to finance the volume of projects that have been announced. So what I think you will see in Abu Dhabi is an attempt to stretch out the delivery of the projects a little bit.”

Funding issues

For now, the majority of the banks in the market are concentrating on their existing networks of clients, both to maintain the relationship for the future, when the climate is better, and because they are a known quantity, so less risky.

“Existing customers are very important to us,” Robert Garden, regional managing director of the UK’s Royal Bank of Scotland (RBS), told delegates. “If a new customer came to us today, I think it would be difficult for us to provide funding to them.”

“It is very difficult for new companies to raise finance for new products at this time,” says Lester Wynne-Jones, CEO for Abu Dhabi and Al-Ain at HSBC Middle East. “Existing customers will always be prioritised.”

There is no doubt that Abu Dhabi needs banks to lend money to companies, and to each other, if its ambitions to transform its infrastructure and diversify its economy are to be met. With a relatively small population, customer deposits alone will not provide the scale of finance needed.

“You cannot expect deposits generated by 4.4 million people to fund $200bn worth of projects in Abu Dhabi alone,” said Parrish.

Recognising the banks’ problem, in October, the UAE government stepped in to provide a guarantee for deposits in all of the banks in the UAE, including both local and foreign institutions.

This was in addition to a AED50bn ($13.6bn) liquidity fund announced in late September to ease the cost of borrowing in the interbank market. But these steps alone will only partly solve the problem, according to bankers.

Alternative options

“The fact is that a guarantee does not provide liquidity,” said Parrish. “The guarantee is phase one of getting the market back to normal.

“The next stage is to get the banks lending to each other again.”

There are alternatives to borrowing from the banks. Credit export agencies are increasingly active in the market, and are prepared to offer funding at a time when other institutions are too nervous.

Japan Bank for International Co-operation (JBIC) provided $3.4bn in commitments to Abu Dhabi in 2007, making the emirate by far the largest single market for the agency in the region, according to Moriyuki Aida, its chief representative in the UAE.

Among the UAE deals for which JBIC has provided financing are a series of independent power and water projects (IWPPs), including $1.1bn for Taweelah B and $1.3bn for Fujairah 2, both of which are being developed by the Abu Dhabi Water & Electricity Authority (Adwea).

According to Aida, the challenge for his agency in the coming year is to increase its lending budget to meet the demand in the market.

The stock market represents a far more limited option, but here too there are initiatives that could help boost the amount of financial activity in the emirate.

According to Tom Healy, CEO of the Abu Dhabi Securities Exchange (ADX), new listings are not likely to be a viable option for many firms wanting to raise new finance in the coming months, because of the poor investment climate, but there are other avenues for companies seeking finance. “The stock market really is a longer-term solution,” Healy told delegates. “It does not really have a short-term solution. For com-panies that are not listed, raising
money in the market is not going to happen immediately.

“Private equity is a different matter. The time cycle in terms of raising private equity is much shorter.”

The exchange also plans to launch its first exchange-traded funds in early 2009, which will invest in domestic and international indices. Its first derivatives products are due to be launched this year.

Positive signs

Overall, despite the worst financial climate in years, there is some lingering optimism in the market, tempered by a recognition that things are not about to improve overnight.

“We are in for a very difficult 12 months,” RBS’s Garden predicted.

But Standard Chartered’s Parrish was more optimistic: “Even if at the moment it is a little tricky, next year I think we will see some improvement in terms of the market. The interbank market is beginning to show signs of functioning normally.”

However, some things are unlikely to return. “Over the past year or so, we have seen some particularly aggressive lending practices and they will not return,” Parrish told the conference.

Panel

  • Moriyuki Aida, chief representative, Japan Bank for International Cooperation

  • Robert Garden, regional managing director, Royal Bank of Scotland

  • Tom Healy, CEO, Abu Dhabi Securities Exchange

  • Jeremy Parrish, CEO, Abu Dhabi & Al-Ain, Standard Chartered Bank

  • Sameh al-Qubaisi, head of institutional and corporate coverage, National Bank of Abu Dhabi

  • Lester Wynne-Jones, CEO, Abu Dhabi & Al-Ain, HSBC Middle East