Wealth Reserves to Shield UAE From Global Credit Crisis
WAM Dubai (WAM) ― The global crisis will have only a limited impact on the UAE economy, thanks to the huge wealth accumulated during the record surge in oil prices, according to a new banking report.
The country will continue to record fiscal surplus in 2008 and 2009 as it has the lowest break-even oil price in the GCC of $23 (Dh84.48) per barrel against the IMF's baseline petroleum price projection of $68 per barrel for 2009, says the report.
Quoting the report by Abu Dhabi Commercial Bank (ADCB), the Emirates Business 24/7 said returns on accumulated wealth relative to the country's GDP are substantial and can be used to mitigate the effect of oil price cyclicality and support investments in infrastructure and diversification.
In addition, the risk of rising inflation has subsided and it is expected to decline as oil and commodity prices fall and the U.S. dollar appreciates. Consequently, the government has significant scope to implement expansionary fiscal policies.
According to IMF estimates, inflation is expected to drop to 10.8 percent next year from 12.9 percent this year, while the current account surplus would reach $55.3 billion against $60.9 billion in 2008. The estimate shows that the current account surplus would reach 22.6 percent in 2008 and 18.8 percent next year. While the GDP growth is likely to drop to six percent in 2009 from seven percent this year.
The bank says the government-backed projects in infrastructure, power and water will remain secure due to economic demand and political will. Planned infrastructure investments announced by the private sector will not be abandoned; however, the pace of growth may slow down.
The report notes that in the previous cycle, mostly petrodollars were mostly spent on consumption, which fuelled growth in Western economies. However, in the current cycle petrodollars were invested regionally boosting productivity. In addition, a rising population and expatriate community will support domestic demand, which will stimulate growth in non-oil GDP. The report claims Asia and emerging economies are beginning to replace Western countries as the UAE's main trading partners, providing some protection against the worst effects of the downturn.
The bank said foreign capital has been leaving the country to attend to pressing liquidity issues in home markets and U.S. dollar credit supply to local institutions has diminished. Even when it is available, it is accessible at a much higher cost.
Despite these challenges, the bank believes that the severity of crisis in the UAE is far less than in the Western countries. As IMF estimates that slowdown in the UAE's growth only represents a transition from an expected growth of seven percent in 2009 to a revised expected growth of six percent.
Assuaging fears about Dubai's debt, the ADCB report says the emirate's debt has been backed by foreign asset reserves that leaves the country's capacity unimpaired. The bank also believes the recent central bank's measures to inject liquidity in the local financial market were merely precautionary and that the underlying financial system is sound.
The report says that corporate fundamentals in the UAE remain largely intact but overlooked.
The UAE penetration rate - the ratio of bank assets to GDP - of 172.9 percent (2007) is lower than the average penetration rate enjoyed by developed countries, emphasizing the sector's substantial growth opportunities. In comparison, the euro region reported a penetration rate of 223 percent for the same period.
The report claims that the sector would greatly benefit from the country's conducive macro-economic environment to sustain future growth. The bank hopes that $360 billion worth of real estate, tourism, manufacturing and oil-related investment projects by Dubai and Abu Dhabi in the medium term and low interest rate due to the dollar peg would stimulate credit growth and mitigate other bear factors.
The sector achieved considerable growth between 2004 and 2007, as measured by all key banking parameters with loans up 39.7 percent, deposits 32.1 percent, and profitability 38.4 percent, due to a highly supportive macro-economic environment.
Return ratios within the sector remained strong due to a robust performance by both core banking and non-interest income. The sector maintained a return on equity (ROE) and ROA of 22 percent and two percent, respectively, during the same period.
The report says regional consolidation, international diversification of revenue base, growth of Islamic banking and adoption of emerging trends will yield value and steer the sector's growth this year.
"Consolidation will occur due to increased competition from foreign banks once trade barriers are lifted. International expansion will permit banks to diversify their current concentration away from the UAE economy. With the UAE Islamic banking sector growing more rapidly than conventional banks, we expect its market share to increase from 15 per cent to 25 per cent over the next three to five years," says ADCB report.
The bank expects the interbank rate to increase by 25bps due to the tight liquidity conditions, thereby, exerting pressure on the net interest margin (NIM).