Record rate of bad loans in UAE banks

The rate of bad loans or bad debts (not expected to be repaid) in UAE banks rose to the highest level in 5 years, amid falling real estate prices and an economic slowdown that cast a shadow on business.

Lenders in the UAE have eased repayment terms by extending loan maturities and cutting interest rates, according to Bloomberg.

Earlier this year, ratings agency Fitch said UAE banks faced an increased risk of deteriorating asset quality due to a weak local real estate sector.

Property prices in the UAE have fallen 20% from their peak in 2014, the agency said in a report published in September.

Asset quality is the main driver of UAE banks’ feasibility rating, which averages “bbb”; however, the feasibility rating is not under immediate threat as it includes some provisions for asset quality deterioration.

Property prices in the UAE have fallen since 2015, mainly due to oversupply, weak consumer confidence linked to lower oil prices, and a less supportive economic environment.

Lower prices have delayed prospective buyers, and foreign buyers have been deterred by the appreciation of the UAE dirham, geopolitical tensions and weak confidence in the UAE.

Last month, UAE banks proposed a credit ceiling that would limit the size of loans allowed to the real estate sector, hoping to protect themselves from a financial crisis amid an increase in doubtful loans and the inability of many real estate companies to service their debts.

Abdul Aziz Al Ghurair, Chief Executive Officer of Mashreq Bank and Chairman of the UAE Banks Union, said that “there is a draft drawn up by the Union of Banks to determine the allowed ceiling for the real estate sector and will be presented to the banks for approval.”

According to UAE Central Bank data released at the end of the first quarter of this year, the real estate and contracting sector holds 20% of the total loans granted by banks in the UAE.

For its part, the International Monetary Fund in its periodic report entitled “Prospects for the global economy”, the crisis of the decline in the growth of the UAE economy due to the countries suffering from the collapse in key sectors.

Growth forecasts for the UAE economy fell to 1.6 percent from 2.8 percent in April on the back of falling oil prices and an economic slowdown in Dubai, the report said.

The UAE economy is heading towards a new financial and banking crisis similar to the indicators that hit Dubai in 2009. Dubai’s debt exceeded $125 billion, and the continued decline in real estate prices threatens the quality of the assets of banks in the UAE and many economic activities.

The continued escalation of the UAE’s economic downturn proves the magnitude of the crisis it is experiencing amid alarming indicators affecting all major sectors and warnings of an imminent comprehensive collapse.

Official data showed the UAE’s annual consumer price inflation contracted by 2.17 percent in September 2019 at a time when the country is suffering the fallout from its wars and foreign interventions.

Inflation hit 108.53 points in September, compared with 110.93 in the same month of 2018, according to data from the Federal Competitiveness and Statistics Authority (government).

The drop was driven by a decline of about 7 groups, most notably transportation by 5.79 percent, clothing and footwear by 7.09 percent, and housing, water, electricity and gas (34.1 percent of consumer spending) by 4.35 percent.

On a monthly basis, inflation fell 0.74 percent, compared with 109.33 points in August. The inflation rate (a figure that measures the cost of access to consumer goods and services) reflects price movements and monitors the price increases in different markets.

Since the beginning of 2018, the UAE has imposed VAT in an effort to boost and diversify non-oil fiscal revenues, with the impact of the implementation of the VAT expected to decline in 2019.