Crisis spawns loan defaults in Dubai

As jobs are slashed and liquidity dries up in the Gulf emirate, borrowing has become almost impossible, especially for items such as luxury cars, financial experts and traders say.

Thousands of job cuts have been announced in the emirate as companies pare staffing levels, while according to reports salaries of some highly paid executives have been slashed in half, reversing a six-year upward trend that had lured foreigners to the city in droves.

Prices in the real estate sector meanwhile have slumped by an average of 25 percent from their peak in September after rallying 79 percent in the 18 months to July 2008, according to Morgan Stanley.

Haissam Arabi, chief executive officer of GulfMena Alternative Investments, paints a bleak picture. "The (credit) default rate has been on the rise with people losing their jobs and being over-leveraged," he told Agence France-Presse.

"People are exposed to the real estate market," he said, adding that some investors had been caught short after hoping to make quick profits from property deals.

"Some have been ... buying two or three properties, but now they have to pay back the developers," he said.

Dubai had in recent years embarked on extensive development projects, with real estate firms promising investors skyrocketing profits and mortgage lenders willingly opening up their coffers to borrowers.

But the global liquidity shortage has hit Dubai businesses hard and many employees have been laid off, prompting the surge in loan defaults and the strangulation of credit.

"Before, money was cheap and it was given to anyone who walked (through) the door, but today, with tight liquidity and high risk, banks are all of a sudden worried about who to extend loans to ... There are questions about people's ability to maintain their jobs," Arabi said.

People working in sales, real estate and investment are among those struggling the most to secure loans, he added.
 
Mounting bad loans
 
Raj Madha, a banking analyst at Cairo-based investment bank EFG-Hermes, confirmed that non-performing loans are on the rise, but he could not provide a figure. He also confirmed that credit was hard to come by these days.

"With the credit cycle tightening, we know that (banks) are likely to pick and choose their customers much more carefully. We hear that individual banks are lowering credit limits on credit cards sharply, in some cases by 75 percent," Madha said.

"Mortgages are also becoming hard to come by, with many fewer banks offering services, and those services becoming sharply more expensive," he added. "The rate of growth in mortgage loans has collapsed from well in excess of 50 percent to a virtual standstill."

The percentage of expatriates versus nationals among defaulters is not clear, Arabi said.

An indication of the scale of the defaulting are media reports - denied by the Dubai authorities - that around 3,000 cars were left at the airport as their expatriate owners fled the country and defaulted on their car loans.

Expatriates in the United Arab Emirates mainly come from South and Southeast Asia, many of them low-paid workers. Hundreds of thousands of Arabs were also attracted by work opportunities, while Westerners were attracted by tax breaks and a potentially lavish lifestyle.

The UAE central bank and the finance ministry have together floated 120 billion UAE dirhams ($32.67 billion) of emergency funding since September to help banks deal with tight credit conditions. But banks have used little of these funds to boost liquidity in the market, said Arabi.