Oil price plunge to trigger more fiscal consolidation

Dubai - UAE central bank ready to act to counter potential slowdown.

The Central Bank of the UAE on Monday cautioned on the impact of the global economic slowdown on non-oil activities in the UAE, and said it would be required to take "prudent measures to counter potential slowdown" in economic activity.
Central bank Governor Mubarak Rashed Al Mansoori warned that a fall in government revenues due to the oil price plunge might trigger further fiscal consolidation, "albeit at a gradual pace to preserve priority spending in support of non-oil growth".
Addressing the third UAE Banks Federation Middle East Banking Forum, Al Mansoori said growth in the second-biggest Arab economy would slow to three per cent this year from 4.6 per cent in 2014.
He said one of the major challenges the banking sector - the largest in the region with total assets that have reached Dh2.4 trillion - faces is the further tightening in liquidity due to slowdown in customer deposits.
"The central bank welcomes the recent diversification of funding sources, like issuance of bonds and sukuks, to finance growth of banks' credit," he said.
Al Mansoori hinted that there would be an "appropriate adjustment" in interest rates in the UAE following any hike in rates in the United States.
Reiterating the UAE's "continued commitment" to the dollar peg on Monday, he said upward pressure on rates was expected to increase if and when the US Federal Reserve starts tightening monetary policy in coming months.
The governor said two major factors have contributed to the exceptional development of the banking sector in the UAE.
"First is the steady increase in customer deposits, reaching Dh1.4 trillion, in a world of continued volatility, and second is a strong capital base, as the average capital adequacy ratio is hovering over 18 per cent, exceeding our regulatory requirement. These strengths allowed our banking sector to expand credit despite a noticeable slowdown in deposit growth," he said.
The governor said the overall ratio of non-performing loans is down from 8.6 per cent in the second half of 2014 to just 6.3 per cent as of September 2015. Improvement in the balance sheets of banks increased the lending to stable resources ratio from 85.2 per cent at the end of last year to 88.1 per cent at the end of September.
Al Mansoori said the central bank was watching the local banking system for signs of stress.
"With the major stakeholders, the central bank is closely monitoring the financial soundness indicators for the banking sector to make sure potential vulnerabilities are identified and appropriate measures are taken on time to hedge against risks that could escalate to a full-blown crisis as our experience has taught us."
UAE banks at the end of the last decade were hit by a local real estate crash and a debt crisis, which forced them to set aside significant cash for bad loans, crimped profits for a number of quarters, and increased loan rates.
Al Mansoori said the government is pushing ahead with plans for a bankruptcy law for the stability of the SME sector.
The central bank also aims to work with its stakeholders to increase institutional support so that SMEs will be in a better position to deal with market forces and have better access to marketing channels, domestic as well as for exports. Another goal is to increase capacity building at SMEs to help them offer better documentation to banks, consistent with internationally accepted accounting practices.
The central bank also seeks to set-up a well-designed and credible credit guarantee scheme, in order "to decrease risks of default for potential lenders that may jeopardise financial stability," he said.
"The government is still continuing with its spending, though they will rationalise any unnecessary investments," Al Mansoori told reporters on the sidelines of the conference.
The central bank had said in July that the UAE government was expected to trim state spending by 4.2 per cent this year in response to reduced revenue because of the lower oil price.
- issacjohn@khaleejtimes.com