The banking sector in the world’s third-largest oil exporter is heavily exposed to the debt problems of state-owned conglomerate Dubai World, which are expected to hamper recovery in the second largest Arab economy this year.
The Dubai World offer is better than what we expected," Younis al-Khouri, director general at the UAE finance ministry told reporters. "It will have a positive impact on banks.
Dubai said on Thursday it would spend $ 9.5 billion to restructure its debt-laden flagship firm in a plan that offered to repay two key bonds and give lenders their money back in up to eight years. Dubai stocks rose to an 11-week high on the proposal.
The cost of insuring Dubai debt fell sharply on the day of the proposal, though they began to rise again the following day on doubts about how the Gulf Arab emirate would fund its share of the plan, which still needs to be cleared by creditors.
Emirates NBD and Abu Dhabi Commercial Bank are part of a seven-member committee believed to have most exposure to the debt-laden conglomerate. Khouri said earlier this month the UAE banks were strong enough to absorb any shock, even from Dubai World’s restructuring, and no capital injection was needed for now.
Estimates of potential exposure of banks to Dubai World has ranged up to $ 15 billion.
The UAE government has, since the onset of the global financial crisis, introduced several measures to shore up local banks’ balance sheets. The UAE still has 20 billion dirhams ($ 5.45 billion) left from a 70 billion dirham facility set up in 2008 to inject liquidity into the banking system, the ministry has said.
