Study by: S&P Global Ratings
S&P Global Ratings expects that resilient financial performance will enable rated United Arab Emirates (UAE) banks to maintain stable credit profiles in 2020, barring any unexpected increase in geopolitical risk or a major fall in oil prices. Although in our base-case assumptions we exclude a fully-fledged direct military confrontation between Iran and the U.S., we do expect tensions to intensify and recede periodically. This will mainly affect the UAE through lower consumer sentiment and delays in leveraged finance investments, which are accentuating price declines in the already-depressed real estate sector.
New real estate supply is expected to continue increasing this year. However, the overall effect is not yet apparent on banks’ balance sheets or income statements. This is largely because mortgage lending still makes a limited contribution to overall real estate transaction volumes, developers’ leverage appears to remain manageable, and banks have used the International Financial Reporting Standards (IFRS) 9 transition to recognize problem loans conservatively.
In 2020, we expect the UAE economy will expand at a slightly higher pace compared with 2019, thanks to Abu Dhabi’s $13.6 billion stimulus package and the Dubai government’s planned investments for the 2020 World Expo (Expo 2020), which should prop-up investments in the non-oil economy and increase tourism-related activities. We also expect mid-single-digit net lending expansion in 2020, supported by some of these projects. The stock of problematic assets (Stage 2 and 3) and loans should remain stable, but we foresee some migration between the two categoriesan d a slightly higher cost of risk at about 120 basis points (bps) in 2020 (versus 110 bps in 2019). Against this backdrop, and continued pressure on net interest margins, we expect a slight deterioration in sector profitability.
Geopolitical risks are weighing on consumer sentiment, but government spending will Support Economic Activity
Event risk rapidly escalated in the Gulf following recent actions by Iran and the U.S, but somewhat receded subsequently. We expect that tensions will intensify and recede periodically but retain our base-case assumption that any action by either side is unlikely to lead to a fully-fledged direct military confrontation.
In our view, both the U.S. and Iran are keen to avoid direct conflict, since this would be economically, socially, and politically destabilizing for the entire region, including U.S.-Gulf allies. It would also prove to be highly politically contentious in the U.S. in the run up to the 2020 presidential election.
In the UAE, the main effect of the tensions has been lower consumer sentiment and delays in leveraged finance investments, which are accentuating pressure on the already-depressed real estate sector. In addition, Dubai’s new home supply is expected to reach a three-year high of more than 50,000 units this year, further exacerbating price pressure.
On a positive note, Abu Dhabi’s $13.6 billion stimulus package and the Dubai government’s planned investments for Expo 2020 should mean slightly higher economic growth compared with 2019. Although lending growth slowed slightly to 4.5% annualized, in the first nine months of 2019, we expect a slight acceleration to 5%-6% in 2020.