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Moody’s upgrades UAE banking outlook amid economic diversification

This shift is attributed to heightened business confidence and government reforms to expand the population and lure foreign investment

Moody’s upgrades UAE banking outlook amid economic diversification
[Source photo: Krishna Prasad/Fast Company Middle East]

Over the past few years, the UAE has actively pursued economic diversification, aiming to establish a more sustainable and resilient economy for the future.

This strategic shift has yielded positive results for the country’s banks, as evidenced by Moody’s Investors Service upgrading their outlook from stable to positive. Moody’s attributed this upgrade to the UAE’s robust and diversified economy.

The UAE’s real Gross Domestic Product (GDP) is projected to expand by 4.6% in 2024, up from 3.1% in 2023. According to a Moody’s report, this growth, particularly in the non-oil sector (expected at 4.5% this year), is seen as a major boost for the banking industry.

“Continued economic growth will translate to better loan repayment capacity for borrowers,” the report stated. “Banks’ strong capital buffers are also expected to improve slightly due to stable profitability.”

The UAE’s economic rebound following the COVID-19 slowdown has been impressive. The Emirates’ GDP surged 7.9% in 2022, the highest in 11 years, reaching $441 billion at constant prices.

Economy Minister Abdulla bin Touq recently announced a projected growth rate of 5% for 2024, driven by the non-oil sector’s expansion and rising foreign direct investment. Notably, the non-oil sector now contributes a record-breaking 73% to the UAE’s GDP.

Loan performance is anticipated to stay stable, with problem loans holding steady at around 4-5% of total loans. Moody’s credits this to the improving economic conditions and sustained credit expansion in the mid-single-digit range. Furthermore, deposit growth is projected to surpass credit demand, ensuring stable bank funding conditions.

“We expect the UAE government’s willingness and capacity to support UAE banks to remain very high,” the report reads. “This is due to local banks’ dominance in the domestic financial system, the banking system’s concentrated structure and the heavy footprint of the UAE government in most banks’ balance sheets.”

Badis Shubailat, an analyst at Moody’s, attributed the shift in positive outlook to elevated business confidence and government reforms aimed at population growth and attracting foreign investment. However, Shubailat acknowledges potential risks, stating, “An escalation of geopolitical tensions remains a concern, similar to other GCC countries.”

Moody’s also reported a continued positive outlook for Saudi Arabia’s banking sector, citing ongoing economic diversification efforts. Increased credit demand for government-backed projects is anticipated to bolster loan performance and drive robust profits in the region’s largest economy.

Additionally, Moody’s predicts a stable outlook for banks across other GCC nations, such as Bahrain, Kuwait, Oman, and Qatar.

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