UAE should spend SWF to revive economy-advisory chief

DAVOS, Switzerland Sat Jan 31, 2009 10:48am GMT

DAVOS, Switzerland (Reuters) - The United Arab Emirates should spend part of its sovereign wealth fund to revive the economy and must delay property projects as demand vanishes, the head of its advisory council said on Saturday. Abdul Aziz al-Ghurair, speaker of the Federal National Council (FNC) which advises the rulers, also said the government must inject more liquidity to boost the economy but banks were sound due to their high capital adequacy ratios.

The UAE is home to the world's biggest sovereign wealth fund as the Gulf nation has kept massive oil windfall revenues to preserve wealth for the future generation. Analysts estimates assets at the Abu Dhabi Investment Authority are worth around $500 billion.

"We have built up huge reserves of $300-500 billion. We can put it into some projects... otherwise when do we spend it? It's for a rainy day," Ghurair told Reuters at the annual meeting of the World Economic Forum.

"We have to adjust to (lower) growth. We must review certain projects. We must postpone the kind of real estate oriented projects. Demand is not there. But the government is committed to accelerate infrastructure projects."

The UAE central bank and finance ministry have together launched 120 billion UAE dirhams ($32.67 billion) of emergency funding since September to help banks cope with tight credit conditions.

"To keep the economy going, we need to pump in some more liquidity," said Ghurair, whose family ranks among the world's wealthiest according to the Forbes rich list.

New lending in the UAE has lost steam in the last five months as banks become more prudent because they face higher borrowing costs and the prospect that some customers may default on real estate loans as property prices fall in Dubai.

The central bank expects credit growth in the second-largest Arab economy would slow to no more than 10 percent this year, after soaring more than 50 percent in the year to June.

OIL RISK

The UAE and other Gulf nations are facing a sharp slowdown as oil prices -- the region's main source of revenue -- tumble more than $100 since a peak last July.

Ghurair said oil price fluctuations did not matter much to the diversified UAE economy, but oil prices below $60-70 a barrel could sap incentives for companies to invest in oil exploration, leading eventually to higher prices.

"It will result in shortage of supply. The world economy will pay for it -- they are now getting a discount."

Ghurair, who is also chairman of Dubai-based Mashreqbank MASB.DU, said UAE banks, including his, had a capital adequacy ratio of 14 percent and the financial system was sound.

Ghurair said he expects Mashreqbank's profit to be flat in 2009. The full-year result for last year is due soon.

Mashreqbank posted a third-quarter profit of 346 million UAE dirhams, down 12.5 percent from the same period last year, due to a decline in investment income.

(Editing by Erica Billingham)