UAE extends deposit guarantee to foreign banks

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DUBAI — This small but wealthy Persian Gulf nation moved aggressively Monday to shield its booming financial industry from the global credit crisis, saying a just-announced guarantee on bank deposits also would cover international banks operating inside its borders.

It was the latest in a series of moves by the region's Arab states to bolster investor confidence in their economies amid the financial crisis — and as tumbling energy prices mean there is less oil money pouring in.

Saudi Arabia joined the UAE in cutting a key interest rate by a half percentage point over the weekend, in line with similar moves by the U.S. Federal Reserve and other central banks. The UAE announced Sunday that it would stand behind checking and savings accounts in its domestic banks.

Natural gas-rich Qatar said Monday that it would inject money into its banking system by buying stakes in a number of domestic banks.

"The authorities are ahead of the curve. They're not chasing events. ... That's very positive," said Marios Maratheftis, who heads economic research in the region for Standard Chartered Bank.

Gulf nations are still making plenty on oil and natural gas, to be sure. The Egyptian bank EFG Hermes estimates regional government budgets, on average, break even when Brent crude oil sells for about $55 a barrel — well below its current price.

But the Organization of Petroleum Exporting Countries is concerned enough about falling prices that it has called a special meeting for November to consider lowering production in hopes of solidifying prices. Crude prices have sunk about 45 percent from their summer highs.

While OPEC's more hawkish members, such as Iran, are pushing hardest for a production cut, even Saudi Arabia and the UAE need prices to stay high to justify ambitious projects like record-breaking skyscrapers and man-made islands.

"OPEC members will likely face a very tough choice," said Addison Armstrong, director of market research at Tradition Energy. "It is estimated that Iran needs $90 per barrel oil to meet its budget. ... At the same time, more conservative members, particularly Saudi Arabia, will be concerned that leaving production levels as they are risks creating a supply glut if global economies slow significantly."

Gulf leaders realize oil prices are only one piece of the puzzle, however.

Countries across the region have been scrambling to diversify their economies by refashioning themselves as financial, trade, education and tourism hubs. The UAE has been one of the most successful, with property prices in the sheikdom of Dubai soaring as job hunters and property speculators snatch up scarce apartments and houses.

But economists warn that the rapid growth could be at risk as the global economy slows.

"If the banks have got no liquidity, then projects will slow down, housing loans will slow down ... and it will feed through into the real economy," said Shayne Nelson, Standard Chartered's chief executive for the Middle East and North Africa.

The UAE, a federation of seven semiautonomous sheikdoms anchored by Dubai and the national capital Abu Dhabi, has been the most aggressive of Persian Gulf nations in attempting to protect itself from the world's economic shock waves.

On Sunday, the Cabinet approved measures to guarantee checking and saving accounts in all national banks, to stand behind loans made among those banks and to inject additional cash into the banking system "if and when necessary."

"We are determined to protect our financial and banking system out of keenness to preserve the interests of our country and people," Sheik Mohammed bin Rashid Al Maktoum, vice president and prime minister of the UAE and the ruler of Dubai, was quoted as saying by the state news agency WAM on Sunday.

The news agency, which often communicates official UAE policies, followed up Monday by quoting an unidentified Ministry of Finance official as saying the deposit guarantee also would cover foreign banks that have "significant operations" in the nation. He said the guarantee would be in place for three years.

Finance Ministry officials could not be reached for comment to provide further details.

The Qatar Investment Authority, meanwhile, said Monday that it would buy up to 20 percent stakes in the nation's banks, the state Qatar News Agency reported. It also quoted Prime Minister Sheik Hamad Bin Jassem Bin Jabr Al Thani as saying Qatar's banks are "in good position and trustworthy."

Middle East investors, who have weathered steep losses in recent weeks, cheered the moves. Saudi Arabia's Tadawul All-Shares Index soared 9.5 percent to close at 6,365.23, and the Dubai Financial Market Index jumped 10.5 percent to close at 3,343.56. Qatar's Doha Securities Market index rose 8.5 percent to finish at 7,624.09.

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