A portrait of the UAE, as seen through bank data

The news on the economy continues to be grim. I went searching for data to help us understand what is going on. I was surprised at what I found. You’ll have to read the article to find out if the surprise was pleasant or not.

In the absence of a team of research analysts to mine the data that I need (free marketing anyone?) I needed to use what is available. One of the best sources of aggregate economic information is provided by the Central Bank of the UAE, available for free on its website.

As a start I took a look at its monthly statistical bulletin for June this year, which it notes is preliminary. I decided to look at some of the more often repeated mantras and see if the data matched. Looking at what is happening with the banks should give us a good idea at what is happening generally.

One of the scariest pontifications is that the Government is withdrawing its deposits, thus squeezing the economy by limiting the ability of banks to lend. Government deposits increased to Dh184 billion, up 14 per cent from Dh161bn in June last year. So, no, the Government is not withdrawing deposits, it has added to them substantially. Pleasant surprise.

But if the Government is supporting the economy through bank deposits, why all the brouhaha about banks not lending? One argument has been that banks might be panicking and therefore refusing credit. Let’s check.

Over a single year, total bank domestic credit is up 7.7 per cent to Dh1.4 trillion from Dh1.3tn. In real terms that is an extra Dh100bn of credit that the banks gave in one year. Cynics might point out that banks have been known to restructure bad loans into new loans, making it look as if they are giving credit when in reality they are rolling over bad debt with interest. I’ll grade this a semi-pleasant surprise.

Related to the above two points is that the Government or its related entities, the GREs discussed in my previous article, might be crowding out private lending. Government lending increased by Dh132 million, a 0.1 per cent increase. No change.

The public sector, though, increased to Dh20bn, a 12 per cent increase compared to the private sector’s Dh70bn, or 7 per cent, increase. The public sector in absolute terms grew at little more than a quarter of the private sector, but in relative terms the growth was two-thirds that of the private sector. Not a big deal for a single year, quite worrying if this is a trend. Pleasant surprise for the Government, neutral to negative for the public sector.

How about this flight of expatriates from the region we keep hearing about? The total expat deposits increased by Dh21.4bn, a 13.7 per cent increase. But this includes expat corporates as well, which increased deposits by Dh19.7bn, a 32.2 per cent increase. Retail expat deposits increased by Dh1.7bn, a smaller 1.8 per cent increase. The foreign corporate deposit increase is a pleasant surprise. The retail expat question is a different matter. The small increase could be because of off-shore remittances or simply that the less well to do feel the pinch first and leave first. So on this issue we remain uncertain.

Overall, what we’ve seen so far seems to point to positive economic indicators. This seems to conflict with the dropping profits and the continuing layoffs. What gives?

The Monthly Statistical Bulletin of the Central Bank looks primarily at the aggregate balance sheets of the banks but not the income statement or cash flow statement. It also does not look at the rest of the economy.

What this means is that the above analysis has by and large ruled out a major credit contraction existing. It can have an effect on the economy by banks increasing interest rates and changing their risk profiles by increasing lending to large corporates and decreasing to the SMEs that provide more than 50 per cent of the country’s GDP.

So what gives? A bit of digging in the substantial databases of The Federal Competitiveness and Statistics Authority uncovered something interesting. The key culprit is Gross Fixed Capital Formation (GFCC), which measures how much was invested in fixed, durable assets such as plants, machinery, equipment, buildings, roads and drains.

Percentage growth in spending or GDP shows the picture for the year – for example, if the Government spends Dh100 one year and this grows 5 per cent then it spends Dh105 the following year. If GFCC is Dh100 one year and this grows by 5 per cent, then the total output potential the following year is not equivalent to Dh105 of assets, but Dh205 of assets. Spending is annual, GFCC is cumulative. What this means is that if the economy contracts, it is very difficult for the fixed assets to contract. Worse, the loans used to invest in these fixed assets need to be serviced.

The moral of the story? The private sector shouldn’t expect its free lunch to last forever.

Sabah Al Binali is an active investor and entrepreneurial leader with a track record of growing companies in the Mena region. You can read more of his thoughts at al-binali.com.


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