Global shocks and the UAE credit cycle
UAE economy has reduced its dependence on oil and gas from 90 per cent in the late 1970's to only 33 per cent now.
The UAE business cycle cannot remain immune to the big chill in global capital markets.
The global credit cycle has an immediate impact on the UAE via oil prices, the US dollar peg, cross border bank credit flows, Federal Reserve monetary policy and world trade. The IMF has cut its 2016 growth forecast to 2.6 per cent, the lowest since 2010. A leading developer just booked a 20 fold rise in penalties from walkaway offplan home buyers. Banks hire "loan rangers" to chase skippy clients. Equities are in a bear market. The UAE credit cycle has turned ugly in 2016.
The UAE business cycle cannot remain immune to the big chill in global capital markets. For instance, the 70 per cent collapse in crude oil and the 30 per cent rise in the US dollar Index has led to a 40-60 per cent correction in Emaar and UAE money centre bank shares since mid 2014. Property prices have also fallen as transaction volumes have halved since the high US dollar has killed offshore demand for luxury properties.
New supply planned and constructed during the bull market of 2013-2014 now face very soft end user markets. Banks are reluctant to finance property developers and even commercial projects. The cost of property finance and loan pricing spreads have almost doubled since 2013. Major banks like NBAD and Mashreq Bank have announced a rise in impairments, funds set aside to cover loan losses. The small medium enterprise (SME) sector has been devastated by the slump in world trade, high rents and a bank credit line freeze.
Thankfully, the $400 billion UAE economy has reduced its dependence on oil and gas from 90 per cent in the late 1970's to only 33 per cent now, a testament to the success of the most successful diversification strategy in modern Arab economic history. Yet the $500 billion deflation shock in the GCC due to lost petro currency revenue will have a seismic impact on the UAE's services, tourism, logistics and capital markets. The UAE is also a net creditor to the international banking system. With $2 trillion in sovereign wealth assets and a mere 12 per cent public debt/GDP ratio, a unique cushion for an economy that blends Abu Dhabi's oil wealth with Dubai's diverse, networked, globalised services economy.
This does not mean the UAE economy will not face a growth decline in 2016 or the banking system escape a rise in loan losses, higher funding costs and a contraction in trade finance, syndicated lending, capital markets and wealth management fee income. Oil prices will range trade in a $25 to $40 range (Brent) in 2016 while the US dollar will remain strong as the Fed tightens (not in the March FOMC) while the Bank of Japan, ECB still print money. With Iran sanctions lifted, record 500 million barrel US inventories and Saudi Arabia's abandonment of its "swing producer" role in Opec, the current 1.5 million barrel a day oil glut will only worsen.
A higher US dollar and protracted lower oil prices mean the UAE economic growth rate falls below two per cent. If a hard landing in China leads to history's first "Made in Beijing" global recession, then all bets are off for the world economy and property markets. The UAE Central Bank has warned local banks against excessive risk to prevent a repeat of the 2008-09 credit cycle. Yet is saddens me to see real estate and construction loans are still one third of all loans (the figure is an alarming 70 per cent in some Islamic banks) in the banking system. Multi-billion dollar "luxury golf course" projects financed by aggressive offshore marketing to gullible offplan flippers face a funding disaster. The lessons of excessive leverage will be relearnt by a new generation of speculators, financiers and home owners only seven year after 2009.
The UAE Banks Federation said small corporate borrowers had defaulted on Dh5 billion in loans till November 2015. This figure will rise in 2016 as anecdotal evidence of expat borrowers "skipping" town to avoid loan repayments mounts.
National Bank of Abu Dhabi (NBAD) is a bellwether as the UAE's largest lender and flagship Abu Dhabi bank. NBAD fourth quarter profit fell 25 per cent as impairment charges doubled. NBAD has the highest quality loan book and lowest cost funding base in the UAE. International banks such as Standard Chartered, Barclays and HSBC have all slashed corporate credit lines, announced mass job cuts and reduced rental space.
Mortgages costs are hugely sensitive to even small rate rises due to the very high loan amounts and long loan tenures. This is why the recent, significant rise in EIBOR is so bearish for home prices. With office vacancy rates at 40 per cent, banking cuts will take a toll on commercial rents. A bank liquidity squeeze guts property prices, as the world learnt the hard way in the autumn of 2008.
Researched and compiled by Matein Khalid. Mr Khalid is a global equities strategist and fund manager. He can be contacted at: email@example.com