Call for agency to buy bad loans

Executives call for creation of Government-backed body to buy loans from local banks to feed struggling companies.

Executives and economists yesterday called for the Government to create an agency that would buy loans from the country's banks as part of efforts to thaw a freeze in lending that is starving even healthy companies of credit. Gurjit Singh, the chief property development officer at Sorouh, called for the creation of a so-called "bad bank", a special-purpose vehicle to buy distressed debt from local banks, as falling property prices lead to a rise in non-performing loans (NPLs). "We need to remove NPLs from the banks, so they can do their work," he said. Analysts said the ideas had merit. "It seems like a logical thing to do," said Fahd Iqbal, the vice president of equity research at EFG-Hermes in Dubai. "Liquidity needs to be redirected to the market." The recommendation emerged during the third annual Abu Dhabi Economic Forum and was among a number of policy prescriptions including increased government spending, more assistance to banks, and direct government financing for companies. "There are pockets of liquidity, but they're not necessarily going through the banking system," said Hani Shamma, the chief executive of Bloom, an Abu Dhabi property developer. He suggested the creation of a special-purpose government vehicle that would buy up existing bank loans and bundle them into securities, thereby freeing banks to make new ones. "You need a government agency that does this form of securitisation." The two-day meeting revealed diverging opinions between official optimism and concern among executives, bankers and economists that the global economic situation is rapidly deteriorating and that the potential repercussions for the Gulf are growing. "The global economy is still falling. Financial markets are brittle, volatile and in many cases barely functional," said Simon Williams, the chief economist at HSBC in Dubai. "I fear that we have quite some ways to go and some months yet before bad news stops." Economists at the forum reiterated calls for the Government to join others around the world that are increasing spending to offset the brunt of the crisis. "The solution is spend, spend, spend," said Giyas Gokkent, the chief economist at the National Bank of Abu Dhabi. Mr Gokkent predicted the country would experience an uncomfortable period of correction before it was able to pull up from the downturn. "We need to see some element of demand destruction before things improve," he said. One of the most immediate problems identified was how to make credit available to companies when banks seemed unable, or unwilling, to lend. Although the Government has taken steps to relieve the funding shortage by pumping Dh120 billion (US$32.67bn) of liquidity into the banking system through loans and deposits, several senior executives said the measures had failed to revive bank lending. Abu Dhabi has also injected Dh16bn of new equity into five of its local banks to shore up their capital base. While panellists hailed such moves, some suggested the Central Bank would still need to do more to increase liquidity. "More money should be poured into banks," said Abdullah el Kuwaiz, the former assistant secretary general for economic affairs at the Co-operation Council for the Arab States of the Gulf in Riyadh. Economists also suggested that the Gulf re-evaluate its policy of fixing regional currencies to the US dollar. Countries with flexible exchange rates, Mr Gokkent said, tended to recover from imported economic crises more quickly. "We have an exchange rate that has become stronger," he said, referring to the dirham's rise with the dollar against the euro, the pound and Asian currencies. "That's something to think about, frankly." [e-mail] [e-mail]