Report: UAE to withstand liquidity squeeze, growth likely to slow

But recent events have shown that as these economies have opened up to the rest of the world in recent years, so too have their vulnerabilities to global economic conditions.

According to a new Standard & Poor's report, titled "UAE Liquidity Squeeze Raises Questions Over Future Growth, But Credit Fundamentals Remain Sound," the tightening in liquidity conditions in the United Arab Emirates (UAE) is only tangentially related to the global credit crunch, and is being driven mainly by a host of country-specific factors, including speculative investor activity surrounding the UAE dirham's peg to the U.S. dollar, rapid domestic growth in recent years, and concerns over the real estate sector.

"While financing conditions are becoming more challenging, we don't consider that the creditworthiness of rated domestic entities will be affected,"

Standard & Poor's credit analyst Farouk Soussa said.

"Refinancing risks will be contained, and the willingness and ability of the government to provide implicit or explicit support in the event of serious financial distress remains strong. If liquidity conditions remain tight, funding future projects will, however, become more difficult, thereby affecting the UAE economy's hitherto extraordinary growth."

The report notes that a cooling in growth would not necessarily be a bad thing as it could alleviate infrastructure and resource bottlenecks that had been stoking inflationary pressures, as well as reduce the risk of a significant oversupply in the real estate market. Indeed, from a policy perspective, given the relative impotence of the central bank to control domestic monetary conditions in the context of the dollar peg, an exogenous tightening of liquidity conditions is a welcome development.

"If this tightening starts to bite too hard, we believe the UAE has the resources to ease liquidity constraints at short notice," Mr. Soussa said.