Liquidity crunch is expected to ease by end of Q1of 2009

Instruments that can be converted into cash easily without a significant loss in value are called liquid assets.

If the market is liquid, or money can be generated easily, then investors will be able to channel funds into projects with ease and at a lesser cost. In times of crisis, companies with more liquid assets will be able to float easily.

The acute liquidity shortage experienced by the UAE's financial system is likely to ease by the end of the first quarter of 2009. However, absence of adequate monetary tools is undermining the process of addressing liquidity into the system.

The (UAE) authorities have the willingness and the financial strength to address the problem, but the absence of the necessary monetary tools will undermine the process. Given the financial strength and the willingness of authorities, it is expected that liquidity in the UAE shall begin to normalize in the first quarter of 2009, given the current liquidity shortage; the UAE's economic growth is expected to slow from 4.8% in 2008 to 2.7% in 2009.

In contrast, the impact of the liquidity shortage on the Saudi economy is projected to be less severe.

When liquidity conditions become tighter, the Saudi Arabian Monetary Agency (SAMA) had more tools at its disposal to manage the situation. As a result, liquidity conditions in Saudi Arabia are now normal.

Given that Saudi Arabia has managed to maintain liquidity at adequate levels, we only expect growth to drop to 2% in 2009 from 2.7% in 2008.

So far, the UAE has committed a total of Dhs120bn in the form of Dhs50bn liquidity support to the banks and additional Dhs70bn direct injections in the banking system.