Interest rate hike and property downturn warning from Bank for International Settlements

The warning follows an over-reliance on cheap credit in many emerging markets.

Last month the IMF called on the Government to take stronger measures to help ease speculation in Dubai’s property market. Satish Kumar / The National

Borrowers across emerging markets worldwide risk being caught out by future interest rate hikes or a sudden property downturn.

The warning from the Bank for International Settlements in its annual report follows an over-reliance on cheap credit in many emerging markets.

“Several early warning indicators signal that vulnerabilities have been building up in the financial systems of several countries,” the BIS said yesterday.

“Many years of strong credit and, often, property price growth have left borrowers exposed to increases in interest rates.”

Credit-to-GDP gaps in many emerging market economies, together with Switzerland, are well above the threshold that indicates potential trouble, the BIC warned, with residential property price gaps (the deviation of real residential property prices from their long-term trend) also pointing to risks.

However such warnings thus far are not applicable to the UAE’s economy, despite rising property prices, according to Simon Williams, chief economist for the Middle East and North Africa at HSBC.

UAE property prices, despite their rises, were not significantly in excess of previous peak prices, as was the case elsewhere, he noted.

“Mortgage lending as a percentage of GDP is still a fairly small proportion of GDP for now,” he said. “I’m not concerned or anxious about where the UAE is in its economic cycle or credit cycle.”

“The risk [of rising property prices] in our view is material, but premature at this stage,” he said. “It’s in the point where there’s still slack to be taken up before you can have real growth without generating significant levels of price growth.”

The report comes ahead of second-quarter banking earnings in the UAE which are expected to show strong credit growth as lenders compete for customers with lower bank interest rates and the cost of home loans also falls amid greater competition.

The UAE’s Central Bank last year issued mortgage caps for nationals and expatriates, as well as guidelines limiting the amount banks lend to government-linked companies to no more than 25 per cent of their equity, or more than 100 per cent of their capital.

In September the Dubai Land Department announced it was doubling the transfer fee levied on each sale in the emirate to 4 per cent of a property’s value in an attempt to reduce speculation.

But last month the IMF called on the Government to take stronger measures to help ease speculation in Dubai’s property market, in the face of rising prices.

The BIS warned that while bond investors were willing to lend generously in benign conditions, they could easily pull out when central banks tightened monetary policy, depriving emerging market companies of access to external debt markets.

Such companies may then be forced to withdraw bank deposits, depriving domestic lenders of funding as well, the body warned.

However the UAE’s economic growth was not reliant on access to cheap credit, said Mr Williams.

“Inflation is picking up but it’s at 4-5 per cent not at 10-12 per cent,” he said. “Obviously there’s some credit that’s been feeding into the value of real assets, but much of what you’re seeing is a recovery in asset prices being driven by the real economy, not just the availability of cheap funding,” he said.

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