UAE Central Bank Follows Global Pattern, Injects $13 Billion Into Economy

Abu Dhabi, UAE (TML - In a move intended to stop the effects of the global credit crisis from impacting too much on the United Arab Emirates, its central bank on Monday decided to set up a $13.6 billion fund for local banks in the event they needed more capital, the Arabian Business newsletter reported.

"I think it is to increase the liquidity in the market, and the other reason is because some of the hot money from hedge funds has been withdrawn from the market in the UAE," Dr Mohammed Abu Ali, chair of the Department of Finance and Accounting at the School of Business Administration at the American University in Dubai told The Media Line (TML).

"Around 80 or 90 percent of that money has been withdrawn," Abu Ali said.

Despite unrivaled economic growth rates in the Gulf, local financial markets are still intertwined with that of the U.S. economy and the value of the dollar.

One of the triggers behind the latest outflow of capital from the UAE was the need for U.S.-based investors to cover their losses at home due to the credit crunch that followed the sub-prime mortgage crisis in recent weeks.

While the region might be full of people interested in investing in the stock market, local banks and brokerage firms have until now been more interested in attracting foreign capital, Gulf-based analysts told TML.

Another thorny issue for the UAE is the pegging of its currency to the U.S. dollar: since the U.S. dollar is currently weak against other major currencies, consequently so is the dirham.

This is fueling record levels of inflation in the UAE, which, instead of having a strong currency due to strong economic growth, finds itself with a weak currency and having to pay more for imported goods ranging from food to technology.

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