A leading debt rating firm said the fundamental credit outlook for the United Arab Emirates banking sector is negative. In its assessment Wednesday, Moody's expressed concern about loans given to “opportunistic” property developers in light of falling real estate prices. The rating firm says other worrying signs include tighter liquidity, falling equity values, and the steep drop in oil prices. Moody's says less oil revenue “will significantly weaken the UAE's fiscal surplus and real economic growth in 2009.” A closely watched real estate report issued Tuesday indicated Dubai home prices dropped 8 percent from the third to the fourth quarter of 2008. It's believed to be the first such decline in years. Local bank interest rates have been allowed to rise in the UAE because the real estate boom had gotten out of control and caused excessive borrowing from the banks which are now suffering a liquidity squeeze. However, banks have been allowed generous special drawing rights and their capital ratios are secure. Lower rents will attract service sector business to the UAE as it will become economic to locate new businesses here, both from the point of view of the cost of residential and commercial accommodation which are crucial for success in the service sector. In short, the UAE will recoup the competitive advantage that it has been in danger of losing in the recent boom. The supply of cheaper property will then gradually be filled up until more is eventually required, and rents will start to rise.
