UAE and the Global Financial Crisis

The financial markets around the world have taken a massive beating, but certainly not the first and certainly not the last. However, as with all such situations of extreme volatility the human mind loses perspective and we begin to forget the context and scope of what exactly is happening. I lived through the Stock Market crash of 1987 and was then trading in the financial markets and saw, one Monday afternoon, everything go red on the screen. It was ofcourse scary to say the least but in months the market had gradually crawled back to not only its former levels but then took off on a barraging bull run through the 1990's. Look at a stock market price chart of the past 30 years and that evening when my heart stopped still is only evidenced by a small jagged little line going down to then rise and leave a small tick mark. I call it the tick mark from the ultimate teacher of financial wisdom; the market itself, which told me I learned something.

I will share what I learned. Crises will come and go; not long ago the Asian Contaignation was seen as the Arrmageddon the financial system as we know it, today people have to stretch their mind to remember what it was. The current crisis is a combination of silly deregulation of the mortgage markets in the US and the abandoned lending of the banks to people who could not afford what they were buying. However, what took the toll was when banks wanted to switch these mortgages into securitized paper (called sub prime paper) and this ofcourse was bought by banks. When accounting rules did not allow this paper to be not marked to market the banks suddenly realized they were holding onto to something that was not that valuable after all. (A dummy version of explaining this). The ensuing concern on the worth of the banks clearly began to hurt their profits and in essence made the world stand up and wonder what was really the true worth if the financial system.

Just prior to the adjustments that took place in the market values, the banking system had been leveraged to around 11 to 12 times the equity base needed to support it. Typically this leverage is around seven times and thus a correction was overdue in any case. Now you will wonder what all this has to do with the UAE market or indeed the GCC market?

Indeed there is some interdependence of financial markets and what happens in New York will have an effect on UAE, Singapore and in small measure to some small Balkan country too. The question is what should be the extent of this impact?

First of all the UAE and GCC banking systems exposure to the sub prime market was negligible in consideration of their size of the domestic banks. In addition none of the local banks were in anyways involved in heavy overseas lending. Yes property markets were a bit over heated and prices has rocketed up and to some extent the argument of supply and demand was being using too often to justify over 100% returns on real estate. Yes there is a strong demand for housing, and my estimate is that this is about 38,000 homes currently needed with an additional 12,000 per year for the next five to seven years. Yes loads of projects have been announced but those nearing completion and fullfiling this demand are few.

Secondly the real estate market had moved up on the back of speculators who chose to put down 3 to 5% on a property and then flipped it to another investor till finally the end user was paying over 40 to 60% more than he could have by buying direct from the developer. So in essence alot of paper profits were being created for middle men who didn't do more than merely be at the right place at the right time with their check book ofcourse.

Thirdly those investors who are serious and hold property for longer than a few weeks or months have the money even today, and for them an opportunity has been created.

What is likely to happen? First I believe people will realize that the market is being talked down more than it should. Second there is no doubt some prices had gone up too much and the greed factor for the developers was too much. These people will have to realize that construction prices have come down and at the same time their is a need to price the projects better and the sales prices too. I foresee developers who will look for say 20% maximum profit and target the end user there is likely to me more joy than headache.

The financial system of the UAE is strong and UAE, especially Abu Dhabi has the firepower to remedy any glitches in the need for money in an instant. Yes the will to do so has to be there, and this is ofcourse going to be tested from time to time. For the moment and based on my experience here it is highly unlikely that UAE will be allowed to have a financial crunch of any sort, not because of the words that can be said but because of the financial resource available to correct things.

I am not suggesting a wild spree of rising prices should occur again but as normalcy has returned to the market, value has been created. Those with strong nerves are more likely to have a better time than those who look at the doom and gloom.