Interpreting Middle East Economic News and Analyzing Market Trends

Category: UAE

Saudi Arabia and the UAE handle bad debts differently, yet both come to the same wrong conclusion

Consumer finance has been on the rise in Gulf countries over the past decade.  Banks have been too eager to give out auto loans, unsecured loans, credit cards and other forms of credit.  This has been a good source of income for banks.  Since the financial crisis, banks have been refocusing on expanding their consumer finance business as they look to reduce their dependence on governments for business (see older post).

 

With interest rates so low (a typical savings account pays 0.5% per year), consumer loans are still on the high end in the Gulf.  A low annual interest rate on credit cards in the region is 24%, regardless of your credit history with the bank.  Some banks, such as Citibank offer credit cards with annual interest rates as high as 36% (is this legal in any other part of the world?).  Auto loans are on the cheaper side ranging from 4%-9% or above depending on the bank.  Interest rates on personal unsecured loans range from 6% to well above 10% depending on the borrower’s income.  It’s no wonder then that consumer loan defaults have been rising.

 

Both Saudi Arabia and the United Arab Emirates (UAE) have seen rising bad debts on bank balance sheets over the past few years.  Though their approach to handling these bad loans were different, they both arrived at the same wrong conclusion.  First, here’s a report from Arab News on Saudi Arabia:

 

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Dubai Financial Market Performance YTD … WOW!

The Dubai Financial Market (DFM) has been on fire since the beginning of this year, up 15% as of yesterday.  Its neighbor, the Abu Dhabi Exchange, is up 10% for the year.  Excellent earnings announcements coupled with a positive outlet for the rest of the year is re-energizing the markets.

Market YTD Return %
Kuwait 6.3%
Saudi Arabia 3.3%
Dubai 14.9%
Abu Dhabi 9.9%
Bahrain All Share 1.9%
Qatar 4.4%
Egypt – EGX30 5.2%
Jordan 4.4%
Lebanon* 2.4%
Morocco* -4.0%
Tunisia* 3.9%

* Traded from Monday to Friday. Returns as of market close on Feb. 4, 2013. Source: Global Investment House

It’s important to note, however, that markets in the Gulf lack the liquidity of larger emerging markets, with the exception of Kuwait and Saudi Arabia.  As such, money flowing in or out can result in huge sings up or down.  For now, investors and market watchers in the region are optimistic that the high-flying performance will the the theme for 2013.  

Gulf banks go shopping in the MENA region

After four years of slow growth or no growth, banks in the Gulf are looking for ways to expand their market reach.  Banks in cash-rich Qatar can only grow so much in their tiny home market, whereas banks in the UAE have a larger customer base to work on.  However, banks in the UAE have been revering from the property bubble and per Central Bank statements, need to reduce their exposure to the government (see older post).

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UAE Central Bank holds off on tougher regulations stating banks are in a good position

Is the headline confusing?  Don’t worry, it confused me too.  Allow me to elaborate.  On January 1, 2013, the UAE Central Bank was supposed to begin enforcing new capital and liquidity ratios for banks in the country.  However, on December 17, 2012, the Central Bank postponed these new regulations until further notice.  In a country where the media is hungry for local news, this story was barely covered and wasn’t even mentioned by international media outlets.  Here’s more from the local paper Khaleej Times:

“The UAE Central Bank has postponed new regulations that limit commercial bank lending to governments and their related entities for further review in a move that is expected to give lenders sufficient time to come to grips the requirements.

The regulator also has put off the implementation of another rule on banks’ liquidity ratios. The rules, originally scheduled to come into effect on January 1, had been designed to help banks withstand market disruptions and avoid a concentration of debt payments.

  

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