Liquidity crunch seen easing in Middle East

The acute liquidity shortage experienced by the UAE's financial system is likely to ease by the end of the first quarter of 2009, according to experts from the Tanmiyat Group, an investment company and real estate developer in the Middle East region. In contrast, the impact of the liquidity shortage on the Saudi economy is projected to be less severe.

According to Tanmiyat, the (UAE) authorities have the willingness and the financial strength to address the problem, but the absence of the necessary monetary tools will undermine the process.

Tanmiyat noted that in the UAE the absence of adequate monetary tools is undermining the process of addressing liquidity into the system. On the other hand, when liquidity conditions become tighter, the Saudi Arabian Monetary Agency (SAMA) has more tools at its disposal to manage the situation. As a result, liquidity conditions in Saudi Arabia are now normal.

"Given that Saudi Arabia has managed to maintain liquidity at adequate levels, we only expect growth to drop to 2 percent in 2009 from 2.7 percent in 2008," according Dr. Kaan who wrote a report for Tanmiyat.

In comparison, "given the financial strength and the willingness of authorities, it is expected that liquidity in the UAE shall begin to normalize in the first quarter of 2009, given the current liquidity shortage; the UAE's economic growth is expected to slow from 4.8 percent in 2008 to 2.7 percent in 2009," projected the report.

So far, the UAE has committed a total of Dh120 billion in the form of Dh50 billion liquidity support to the banks and additional Dh70 billion direct injections in the banking system.

In the markets, liquidity means the ability to buy and sell assets quickly and in large volume without changing the asset's price in a major way. Instruments that can be converted into cash easily without a significant loss in value are called liquid assets.

If the market is liquid, or money can be generated easily, then investors will be able to channel funds into projects with ease and at a lesser cost. In times of crisis, companies with more liquid assets will be able to float easily.