By Bernd Debusmann Jr
The UAE Central Bank this week announced 'targeted economic support scheme' to support the economy amid the coronavirus pandemic
A $70 billion stimulus package from the UAE government will help bolster bank liquidity and limit asset deterioration amid the ongoing coronavirus pandemic, although it may increase the potential for problem loans, according to ratings agency Moody’s.
Earlier this week, the UAE Central Bank announced a targeted economic support scheme’ of $70 billion to support the economy amid the coronavirus pandemic - double what it announced the previous month.
“Relaxing liquidity buffers will, over the next few months, support banks’ liquidity and ease potential funding challenges, and if it results in increased lending to liquidity-constrained borrowers, will limit bank’s asset quality deterioration,” the report said.
The report added, however, that the requirements of the liquidity buffer and cash reserve are likely to be “unfavourable” towards unsecured creditors because of a risk that banks resilience will weaken, and in turn prompt early regulatory intervention.
Additionally, Moody’s believes that the introduction of transitional arrangements “will delay banks creation of provisioning buffers to absorb potential future credit losses, a credit negative.”
“Nonetheless, the transitional arrangements give banks greater flexibility to support borrowers facing temporary liquidity issues,” the report added.
The Moody’s report also noted that asset quality acceleration related to the Covid-19 pandemic will “exacerbate” existing deterioration derived from slowing global trade, a drop in oil prices, a strong local currency and geopolitical tensions.
“Substantial ongoing restructuring of corporate debt will limit reported problem loans, but will increase potential problem-loan formation,” Moody’s said.