Inflation in the UAE is expected to ease to two-three per cent this year and 2010 would be a year of recovery for the Gulf, Asia and Africa regions while economies like the US, UK and Eurozone are likely to take much longer to recover, Standard Chartered bank said yesterday.

Deflation could be a possible risk but not necessarily a threat to the UAE's economy. While some banks are already lending, the estimated Dh110 billion liquidity gap needs to be filled for the banking sector to re-start lending, Standard Chartered said in an economic briefing in Dubai.

The region, with its strong fundamentals, would be quick to recover and at the same time should aim at a "good quality, sustainable" growth instead of a high growth. Unlike last year, which saw growth in credit zoom to almost 50 per cent for the UAE in June, a growth of 10-15 per cent is desirable in the present situation, the bank said.

"Inflation in 2009 will be two-three per cent. The key drivers of inflation in 2008 – liquidity, cost of housing and cost of food, are not expected to push it this year. I do not think inflation would be the focus of attention. The risk of deflation, which we stand exposed to in case credit crunch gets severe and labour market deteriorates further, is there but it s unlikely to happen," said Marios Maratheftis, Regional Head of Research, Middle East, North Africa and Pakistan, Standard Chartered.

"I think two-three per cent is a healthy inflation for economy to have," he added.

He said the UAE is one of the wealthiest countries in the world and it should not just be looking at strong growth but at quality of growth, a sustainable growth.

"Now is an opportunity to reassess to ensure we have lower but sustainable rates of growth.

"We believe that 2010 would be recovery year for the UAE, GCC, Asia and Africa. At the same time we expect UK, US and Eurozone will take much longer to recover. It's a global crisis. This is an economic crisis, but it is not a crisis that has originated in Asia, Africa or the Middle East. Structurally, economy here is much stronger than most economies."

He said the downside in the real estate is in fact positive for the economy as funds and human resources that were being directed to the real estate primarily, can now be used for other productive sectors of the economy as well.

Banking sector is facing a liquidity shortage and measures like an additional liquidity injection and a permanent repo window would help plug it, said Shayne Nelson, Regional Chief Executive Officer, Middle East and North Africa, Standard Chartered.

On the time frame that borrowers can look forward to flow of money from the banks, Nelson said: "We are lending now.

"We are lending now. We have not stopped it. For the sector, it depends banks' risk appetite and also availability of liquidity in the region. As you see more stimulus packages from the government, we can see flow of liquidity in the region. As per our estimate an additional Dh110bn is needed."

The UAE authorities have responded well to the situation and the support in the form of direct injection has added to the confidence in the region, he said.

Maratheftis said credit growth in the UAE was reaching "satisfactory" levels. "The previous credit growth of 49 per cent in June last year for UAE was not desirable. It was one of the reasons we are in a situation that we are in now. We believe that 10-15 per cent would be more than adequate."