UAE 2009 economic recovery 'not guaranteed'

But it warns that while forecasts suggest improved economic conditions later this year, there is 'no guarantee' of a 'meaningful recovery of activity in the real economy much less a return to the buoyant conditions of the recent past'.

The report continues: 'Accordingly, expectations of even modest growth in the real economy this year may turn out to be disappointed.'

The report says that authorities have spent considerable effort trying to stabilise the banking and finance sectors and that this will help re-establish confidence.

But while there have been efforts to ease the shortage of liquidity, Standard Chartered Bank said earlier this week that there is still a severe shortfall in the system.

It believes the liquidity shortage is around Dhs110bn. 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.'

NBK points to efforts such as cutting the repo rate to 1%, introducing a liquidity shortfall facility and the introduction of a US dollar swap facility, as well as moves to shore up confidence in the banking system and calming fears about default risks as helping with boosting confidence.

However, it warns that these measures in themselves will not set the 'stage for a wholesale turnaround in financial conditions', due to a number of reasons. These included the fact that inter-bank lending remains tentative, that banks continue to suffer from a funding gap and that measures taken so far have not stabilised asset markets.

The report concludes that while GCC economies are in a better position to handle a downturn, partly because of huge cash reserves, the private sector is exposed and will continue to be exposed however much support is provided by the government.

'The absence of a sustained recovery in either bank lending or asset prices combined with weakness in domestic demand seems to us to leave the risks surrounding the consensus view of economic growth this year as stacked to the downside. We expect to downgrade our forecast for GDP over the next few weeks,' it says.