UAE corporate borrowing defaults will shoot up to 20 per cent next year due to a still sluggish real estate sector. But government and state-backed entities are not likely to default.

Because most defaults mushroom only after the aftermath of the crisis, the peak of credit defaults are only to be seen in 2010, Christiano Zazzara, Head of Banking Business, RiskMetrics Group told Emirates Business.

"There would be a higher increase in defaults next year because of a big cooling of the real estate market and therefore we'll feel an impact from that," said Zazzara.

"Default in the UAE can increase by 15-20 per cent and they will come mostly from the commercial side. We don't think the government and government-backed entities will default," he said.

He said that despite an improving investor sentiment, the UAE is still facing a liquidity crisis.

"Credit crunch is still going on. It is still a problem because there is a lack of liquidity so banks are very reluctant to give loans so this could be a problem," he said. "Even over 2010, we can still see this tension in the GCC market. The commercial sector could be more vulnerable."

Empirical evidence shows that in periods of crises all credit risk variables move up. From 1989 to 1990, mean default rate increased from 2.43 per cent to 4.14 per cent, while mean recovery rate decreased from 43.36 per cent to 25.24 per cent.

From 1998 to 2001, mean default rate increased from 1.6 per cent to 4.98 per cent while mean recovery rate decreased from 41.1 per cent to 23.34 per cent.

In the UAE, Zazzara said, recovery rates could also decrease due to the cooling-off of the real estate market.

DIFC Chief Economist Nasser Saidi said the peak of default in the UAE could be longer compared to other developed economies. "This region is different from the US because bankruptcy laws and legal processes are not comparable to the US. The banks here might be willing to wait longer," he said.

Saidi said big state firms will not default and may rather see consolidation and mergers/acquisition to avoid defaults. "But for medium size companies, family businesses we might concede that a few might go bankrupt," he said.

Suspected Money laundering cases increase

The number of suspected money laundering transactions being reported by UAE-based banks and financial firms in DIFC has increased, as per expectations.

Bryan Stirewalt, Director, Supervision at Dubai Financial Services Authority said the rise, which he declined to quantify, was contributed by the increase in the number of firms as well as the effects of the global crisis.

"If you look at the numbers, it looks larger than what it is compared to last year," he told Emirates Business. "We have seen an increase in the number of suspicious transaction reports (STRs). When the economy is bad financial crimes also increase. The firms are also growing. So every year, we are going to have more STRs filed in the Anti-Money Laundering and Suspicious Cases Unit of the UAE."

According to Saeed Abdullah Al Hamiz, Senior Executive Director in the UAE Central Bank's Banking Supervision and Examination Department, 6,198 STRs, pertaining to money laundering have been filed in the UAE in the first five months of this year.

He said the number may increase to 15,000 for the full year, a 10 per cent increase from last year's level. In 2008, 13,101 STRs were filed, bringing the total to 80,592 from 2002 to date. In the US, in comparison, banks and financial firms reported a million dubious transactions last year. Of the total STRs filed in the UAE to date, 285 have been referred to the UAE Public Prosecutor's Office, of which 20 have reached the courts.