Abu Dhabi’s CDS level reflects its dynamic economy, fiscal position

The Credit Default Swaps (CDS) for the government of Abu Dhabi fell from 44 bps in December 2023 to 40 bps in March 2024. According to the Central Bank of the UAE (CBUAE) Quarterly Economic Review June 2024, the Abu Dhabi CDS level continues to remain very low, a testament to its dynamic economy, strong fiscal position and large sovereign wealth funds. Abu Dhabi continues to have one of the lowest CDS premiums in the Middle East and Africa region. Dubai’s CDS also fell from 71 bps in Q4 2023 to 65 bps in March 2024.

The CBUAE said that the UAE banking sector maintained sufficient capital levels on aggregate, with overall capital adequacy ratios remaining well above the regulatory requirements. The Capital Adequacy Ratio reached 18.0 percent and the CET-1 ratio (Common Equity Tier 1 Ratio) improved to 15.0 percent, both increasing by 0.2 percentage points compared to a year ago.

The UAE banking system’s double-digit deposit growth continued contributing to ample liquidity and funding buffers. The liquidity and funding ratios continued to improve with the Liquidity Coverage Ratio and Net Stable Funding Ratio at 157.7 percent and 113.6 percent, respectively.

The UAE banking system’s asset quality ratio improved marginally, contributed by a decrease in the stock of non-performing loans. The Net NPL ratio (Net Non-Performing Loans Ratio) moderated to 2.3 percent and the NPL ratio to 5.6 percent in the first quarter of 2024. The total provision coverage ratio increased to 94.9 percent and the specific provision coverage ratio to 60.8 percent.

The combined lending portfolio of the UAE banking system grew by 8 per cent year-over-year (YoY) at the end of the second quarter of this year, driven mainly by domestic credit, reflecting the expansion of loans to individuals and private sector companies. Domestic credit to individuals grew across key sub-categories including mortgages, personal loans and auto loans, while domestic credit to individuals grew by 8 per cent YoY at the end of the second quarter.

Last week, Scott Livermore, ICAEW Economic Advisor and Chief Economist and Managing Director of Oxford Economics Middle East, projected that the UAE economy will expand to 4.8 per cent in 2025.

In a statement to the Emirates News Agency (WAM), Livermore attributed the expansion of the non-oil economy, which is expected to grow by 4.6 per cent year-on-year in 2024.

He added that non-oil sectors, mainly travel and tourism, will continue to grow strongly, with visitors to Dubai and traffic through DXB reaching record levels. “We expect visitors numbers to continue to expand strongly, growing by over 20 per cent this year and achieving double-digit growth again next,” he said.

Livermore added that the country has faced some challenges, particularly significantly higher interest rates; its economy has weathered the challenge due to the government support as growth and diversification plans are implemented.

“Investment activity is expected to be strong in the UAE as plans around ‘We the UAE 2031’, D33 in Dubai, and other strategies are implemented,” he explained.

He also emphasised that the UAE is increasing its attractiveness to foreign investors and talent through schemes such as allowing 100 per cent foreign ownership of onshore companies and lowering costs to establish businesses, which have contributed to population growth and bolstered the real estate market.

He noted that policymakers also focus on innovative and emerging sectors across finance, creative industries, manufacturing, and other sectors.

Regarding US Federal Reserve interest rates, Livermore said, “We expect the Fed to cut interest rates in September, and it is shifting its focus to the labour market away from inflation, that the Fed is no longer laser-focused on inflation and the risks to the labour market are on its radar.

“We expect the Fed to cut by 50bps by end-2024 and 150bps by end-2025 but the rates cuts could be more frontload if the labour market deteriorates more markedly than we are assuming.”

Livermore also expected the world economy to grow by 2.7 per cent this year and next, noting, “We believe the growing concerns that the US might be slipping towards a recession are unfounded and think recent news remain consistent with a more orderly and benign growth slowdown.”

Meanwhile the latest ICAEW Economic Insight report for the Middle East, prepared by Oxford Economics, said that the GCC region is poised for a significant rebound, with growth projected to more than double to 4.4 per cent in 2025.

The report highlighted that while economic growth in the Middle East is projected at 2.1 per cent in 2024, a significant acceleration to 3.7 per cent is expected in 2025.

WAM