Russia-Ukraine war has limited direct impact on UAE, Saudi banks

Banks in the UAE, Saudi Arabia, and South Africa will remain relatively insulated from the fallout of the Russia-Ukraine conflict due to limited dealings with Russian and Ukrainian counterparties while Turkish and Tunisian banks are most likely to suffer from the negative indirect effects, S&P Global Ratings said on Monday.

For the UAE banking sector, the conflict is likely to have limited impact for now, given their limited exposures to Russian and Ukrainian counterparties, the rating agency said.

“However, there could be indirect impact on the UAE due to higher oil prices and increased investor risk aversion, although the government is likely to support banks should the need arise. Supportive government policies and normalizing non-oil activity will also impact economic growth on the upside,” S&P said in a previous report, noting that improving economic sentiment and higher hydrocarbon production should lead to accelerated economic growth in the UAE.

The major indirect effects of the conflict will include higher oil prices, which will bolster oil exporting economies and weigh on oil importing countries, it said.

While higher food prices will lead to inflationary pressure and current account deficits, there would be increased investor risk aversion, which could increase vulnerability for banking systems with substantial net external debt, S&P said.

“The Turkish and Tunisian banking sectors are most likely to suffer from negative indirect effects, while we expect Saudi, United Arab Emirates, and South African banks will remain relatively insulated,” said S&P Global Ratings credit analyst Mohamed Damak.

Qatar and Turkey showed significant vulnerability in terms of funding and liquidity due to the Russia-Ukraine conflict, while the economic and credit growth of Turkey and Tunisia were highlighted as significantly vulnerable due to the conflict.

Egypt’s banks sector remains exposed due to the country’s significant reliance on staple food imports, the report stated, which added that government support could be vital to mitigate the damage to the nation’s economy.

Ukraine and Russia accounted for approximately 85 per cent of Egypt’s wheat imports in 2021. Higher food prices lifted inflation to 8.8 per cent in February 2022, prompting the Central Bank of Egypt to increase interest rates — for the first time in years – by 1 percentage point.

— issacjohn@khaleejtimes.com