By Bernd Debusmann Jr
Moody's Investor Services expects 'broad-based shock' to the UAE's economy
The ongoing coronavirus epidemic may lead to reduced borrowing and lending, impacting banks that work in corporate and personal finance in Dubai and the Middle East, according to Mathieu Vasseux, head of financial services MEA at Oliver Wyman.
According to Vasseux, growing anticipation of a cyclical economic downturn accelerated by the impact of the coronavirus has worsened credit quality and limited funding, which in turn will place greater pressure on the liquidity of financial institutions, particularly banks.
Earlier this week, the Central Bank of the UAE (CBUAE) requested that banks implement measures to counteract the effects of Covid-19, including rescheduling loans, offering temporary deferrals on monthly loan payments and reducing fees and commissions.
Oliver Wyman noted that poorer credit quality increases the reliance on the banking sector to provide loans and fund development, placing greater pressure on liquidity levels. Impaired liquidity in the banking sector limits funding, which could raise a barrier toward business growth and personal finance relief that could lead to a detrimental cycle in the region.
In terms of long-term impact, Oliver Wyman noted that it depends on its duration, how far it spreads and the extent quarantines disrupt labour.
A separate report, from Moody’s Investor Services, predicted that the coronavirus will lead to “broad-based shock” to the UAE’s economy by negatively affecting its key non-oil sectors, such as tourism, transportation, trade and real estate.
“Travel bans to and from affected areas will negatively affect tourism, hospitality and transportation, as will reduced demand from the curtailment of non-essential travel and other measures,” the report added.
Additionally, the report noted that trade is heavily exposed to the impact of the virus, particularly as the UAE’s largest non-oil trading partner is China.
“The UAE is also a global trade hub exposed to any adverse effect on global growth from an extended coronavirus outbreak,” the report said. “Sectors that rely on positive investor and consumer sentiment such as real estate, and consequently the construction and contracting sectors, would be materially affected should the situation prove prolonged.”
Moody’s said that it expects that borrowers in the tourism, transportation, trade and real estate sectors will be the most affected.
As of December, credit to the wholesale and retail trade sector accounted for 9 percent of the system-wide loan book, while credit to the transport, storage and communication sectors was 5 percent.
The construction and real estate sectors comprised 19 percent of total loans.