Economy expected to contract 0.6 percent this year

The UAE Central Bank will keep interest rates low in 2009 as the Arab world’s second- biggest economy contracts due to falling oil prices, Central Bank governor Sultan bin Nasser al-Suwaidi said.

Monetary policy “is going to be expansionary, which means interest rates will remain low for the whole year,” al-Suwaidi said at an Islamic finance conference in Singapore today. The economy “will contract” in 2009 “because of the oil situation.”

The economy is suffering after oil prices tumbled by about $100 a barrel from a July high and the global financial crisis hurt its key property, financial services and tourism industries. Abu Dhabi, the largest of the U.A.E.’s seven emirates and home to most of the country’s oil, has cut oil output to meet targets set by the Organization of Petroleum Exporting Countries.
The oil industry contributed 62.1 percent of UAE’s gross domestic product in 2008, the Ministry of Economy said March 25. The country holds about 8 percent of global crude oil reserves and is OPEC’s fourth-largest producer.

The Central Bank cut its repurchase rate by half a percentage point to 1 percent on Jan. 19 after a similar reduction on Oct. 8. The three-month Emirates Interbank Offered Rate remains at 2.5 percent as bank liquidity stays tight, though down from a high of 4.7875 percent in October.

Liquidity Improving

Liquidity in the economy is improving and the gap between commercial banks’ loans and deposits has narrowed to 92 billion dirhams ($25 billion) from 110 billion dirhams in March, Al Suwaidi said. The gap has fallen “due to growth of local deposits with banks,” he added.

The Central Bank in October set up a 50 billion dirham ($13.6 billion) credit facility for lenders and the federal government said it would deposit 70 billion dirham with banks to provide liquidity and lower interest rates after global credit markets froze. The UAE has 52 local and international banks, including units of Citigroup Inc. and HSBC Holdings Plc.

The UAE economy will contract 0.6 percent this year, Merrill Lynch & Co. said in a March 13 report.