Islamic Finance

UAE banks’ asset quality likely to deteriorate but cen bank’s 100 bn dirhams scheme will soften COVID-19 blow – Moody’s

Moody’s expects UAE banks’ asset quality to materially deteriorate amid the COVID-19 pandemic but the support scheme announced on Mar 14 will mitigate the extent of the deterioration by keeping some borrowers' liquidity issues from becoming solvency issues, said the credit rating agency.

The Central Bank of the UAE on Mar 14 released a 100 billion dirhams ($27.2 billion) Targeted Economic Support Scheme to reduce the economic fallout of the COVID-19 pandemic. The scheme will support banks’ liquidity by providing cheap funding to meet cash calls from affected borrowers.

Moody’s said on Tuesday (Mar 17) it expects borrowers in the tourism, transportation, trade and real estate sectors to be the most affected, and small and medium enterprises (SMEs) to be particularly vulnerable to economic shocks.

“At year-end 2019, credit to the wholesale and retail trade sector accounted for 9% of systemwide lending; credit to the transport, storage and communication sectors was 5%; and credit to the construction and real estate sectors (including hospitality) was 19%,” said Moody’s.

UAE has taken a host of preventive and precautionary measures to curb the spread of COVID-19 especially since it was declared a pandemic by the World Health Organisation on Mar 11.

Moody’s expects the fallout from the pandemic will further hurt the already challenged economy.

“The asset quality deterioration that we expect from the coronavirus outbreak will exacerbate preexisting asset quality deterioration from slowing global trade, low oil prices, a strong local currency and geopolitical tensions,” said the credit rating agency.

“Substantial ongoing restructuring of corporate debt will limit reported problem loans, but will increase potential problem loan formation. Systemwide, problem loans were around 4.6% of gross loans as of December 2019.”

UAE authorities have also stepped in with other support for businesses. On Mar 13 the Dubai government announced a 1.5 billion dirhams economic stimulus package to help reduce the cost of living and doing business. It includes initiatives such as a reduction in utility bills, and lowering or cancellation of various types of fees.

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