Disposing Of Bad Debts Boosts Credit Growth In UAE

The banking sector in the country has come a long way in cleaning up its balance sheets from accumulated bad debts that followed the global financial crisis.

While a few banks, particularly the Dubai-based entities, continue to have high provisions due to the restructuring of a few government-related entities, the banking sector as a whole in the country has addressed asset quality issues, fortified their balance sheets with high capital adequacy and significantly lowered the loans-to-deposit ratios.

Despite the improved balance sheet strength, private sector credit growth remains sluggish. The International Monetary Fund (IMF) and rating agencies such as the Moody’s and Standard & Poor’s have warned that the upcoming debt maturities of GREs and their historically high reliance on foreign banks could impact the liquidity of local banks.

“To the extent that European banks [in particular] are unwilling or unable to roll over loans maturing this year, demand for local borrowing by public sector entities is likely to remain high in 2012,” said Khatija Haque, senior economist at Emirates NBD.

Recent UAE Central Bank data shows that public sector borrowing surged to 36.8 per cent at the end of 2011 — up from 13.3 per cent at the end of 2010.

“The most obvious casualty of the increase in public sector borrowing is the anaemic rate of private sector credit growth, which stood at just 2.1 per cent at the end of last year,” said Haque.

Analysts say the improved public finances due to high oil prices can boost domestic lending eventually. While the increased wealth of sovereigns will support the GREs to borrow easier and cheaper from overseas for their funding needs, it will reduce pressure on banks to fund GREs.

“The placement of government surpluses on deposit with local banks could help keep interest rates low and create a pool of liquidity,” said Elizabeth Martins, an economist with HSBC, according to Gulf News.