UAE Witnesses Credit Growth

The UAE has witnessed credit growth, and that positive development will help the country’s economy continues to diversify, according to a latest study by Dubai Economic Council, or DEC.

“There is a need for monetary policy and regulation to be countercyclical in order to try to smooth the cycle and its impact on economic activity,” according to the DEC’s working paper entitled “Monetary policy: Constraints and measures”.

The study said that credit in the UAE has been growing both in absolute terms and as a percentage of GDP. This is a positive development that will intensify as the UAE economy continues to diversify, and as its financial markets and banking sector develop further.

“Credit, however, is showing cyclical behaviour, sometimes overshooting trend growth and at other times undershooting the trend. By their nature, credit cycles tend to be strongly correlated with business cycles,” according to the note by the DEC.

This note has been prepared for Dubai’s Economic Council and is divided into three main parts. The first section looks at the credit cycle and its mechanics. The second section looks at the constraints facing the UAE monetary policy framework. The third section looks at possible policy measures that can be implemented.

There are two main facts when it comes to credit in the UAE. First, and despite the short history of data, credit as a percentage of GDP is increasing as the economy matures.

Second, even within the short period between 2002 and 2008, credit moved in clear cycles, overshooting and undershooting its longer-term trend. In the past, given the low level of credit as a percentage of GDP, the credit cycle had little effect on the overall economy. Now, however, with total credit at 98 per cent of GDP and rising, the credit cycle will have a significant impact on economic activity.

The credit and business cycles are interrelated, with each affecting the other. When the policy environment is accommodating, as was the case in the UAE in 2008, the banking system eases lending conditions.

This usually leads to some increase in economic activity (economic output) as borrowers take advantage of cheaper credit to facilitate greater consumption and/or investment expenditure. Asset prices also rise, as some of the additional credit is channelled into asset markets.

This applies to both the corporate sector and to households. In the UAE, the housing market appreciated strongly in 2008, benefiting from ultra-loose monetary conditions and the credit boom.

Khaleejtimes