UAE inflation of 3% predicted

The bank's bullish inflation prediction is lower than that of the UAE government for 2009 and far less than the double digit increases experience last year, when the economy was overheating.

With the acceptance that 2009 will be tough, Standard Chartered believes there are positives to take from the downturn.

While money was poured into real estate last year, there is now an opportunity to invest in other areas of the economy, such as finance, tourism and ports. Equally, it is a time to usher in sustainable growth, rather than just having strong growth, said the bank.

Marios Maratheftis, regional head of research, Mena at the bank, said: 'In the past the real estate market was booming. In fact in 2008 the real estate market became a one way bet. People were only thinking of the upside without considering any risk.'

He added: 'The story for Dubai going forwards is about the economy as a whole. It will not be a story just about the housing market. As painful as a correction might be when you are going through it, it is positive for the UAE economy. It's a positive because we're going to see inflation becoming much lower. I'm more optimistic on inflation than UAE officials who are predicting 6-8%.'

However, while the economy will slow down, and is unlikely to fall into deflation, it needs a significant increase in liquidity. The bank believes there is a Dhs110bn liquidity shortfall, despite recent measures to inject money into he system.

Standard Chartered believes that the UAE needs a direct injection of liquidity. Shayne Nelson, regional CEO Mena, at Standard Chartered, said: 'We're seeing liquidity come through. I still think we need considerably more to actually loosen up the system. Our view is a Dhs110bn shortage at the moment.'

He also said the UAE needs 'stickier' liquidity that can be used for longer term loans. The UAE experienced explosive loan growth up to June 2008 of almost 50%, much of it funded by peg speculation. 'A lot of the long term funding came out of short term deposits. So there was a mismatch,' said Nelson.

That inflow of money has now reversed, with the Dubai Chamber of Commerce and Industry estimating that $136bn of that inflowing money has since left, creating the gap between loans and deposits.

Project finance will also be more difficult in this market, admitted Nelson. Project finance is typically long term and usually enjoys small margins, making it harder to get in the current credit crisis, because there is less of an appetite for taking risks.

'You are not seeing a lot of big loan syndications at the moment that have been highly successful. We're not seeing a lot of bond or sukuk issues and that's all around liquidity and risk appetite,' said Nelson.

He believes the mix of debt and equity in project finance will have to change, with more equity going into projects. 'It will be a strain on infrastructure expansion where it relies on debt for a while until we get back too more normalised liquidity and risk appetite' he said.