National Bank of Dubai (NBD) report suggests that the health of UAE's growing economy is presently at threat due to high inflation & lenient lending system in some banks, reports Gulf News.
The report titled 'UAE Focus' predicts domestic inflation in between 12-15 %, higher than Central Bank & IMF (International Monetary Fund) estimates. Figures indicate that personal loans increased by 64 % last year to US $ 26.6 Billion & by 37 % in first quarter of 2006.
High inflation has become the biggest risk to UAE economy, said NBD report. Despite Central bank's continuous rhetoric of holding inflation below 4%, there are no indications of price declines, mainly in rentals.
"Central bank is in a difficult situation. It can't just lift interest rates to curb inflation as that would draw more capital to UAE," said an analyst at RNCOS.
NBD warns of rising asset quality troubles & insists the concerned authorities to not overlook any warning signs. Personal loans that are disbursed by various commercial levels are well above healthy levels but are major concern due to lenient lending system adopted by various banks.
Personal loans have increased to 27.7 % (as a percentage of overall credit) last year from 24.1 % & will probably increase further this year.
NBD also expects decline in housing prices in 2007-08. As may banks tend to ignore consequences due to high lending in housing sector, increasing mortgage payments, increasing debt & declining home prices could result in low asset quality if monitored carelessly.
Residential rents that contribute 36.14 % to UAE price index have increased by 15 % (or more) this year (2006) thus raising inflation rate. Oil price hikes & decline in dollar have also contributed in increasing costs of living. Earlier in October, IMF estimated inflation at 8 % for this year and a decline of 5 % next year.
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