COVID - 19 UAE

Impact of COVID-19 Pandemic in UAE

Impact on UAE economy due to decreasing Oil prices

  • As a result of the raging supply war between KSA and Russia, oil prices plunged from $70 per barrel on January 6, 2020 to a low of $15 per barrel in March 2020. This has affected fiscal plans in the Middle East area.
  • Gulf region has low debt-to-GDP levels, but the recent sharp fall in oil prices is expected to hit reserves. And even after the recent deal, oil prices are expected to remain low in near future.
  • According to the Institute of International Finance (IIF), the combined current-account balance for the nine MENA oil exporters will shift from a $64 billion surplus in 2019 to a $104 billion deficit in 2020, assuming oil prices averages at $44 a barrel.
  • The IIF forecasts the region's weighted average fiscal deficit widening further from 3.4% of GDP in 2019 to 8.1% in 2020 and expects weighted average non-oil real GDP growth to decline from 2% in 2019 to 0.4% in 2020.
  • The decreasing oil price and Covid-19 pandemic has resulted in GCC facing cash crunch.
  • All GGC governments have responded with measures to protect liquidity in the banking sector by reducing day to day funding, however, this might not turnoutto be enough.
  • Gulf region has low debt-to-GDP levels, but the recent sharp fall in oil prices is expected to hit reserves. And even after the recent deal, oil prices are expected to remain low in near future.
  • According to the Institute of International Finance (IIF), the combined current-account balance for the nine MENA oil exporters will shift from a $64 billion surplus in 2019 to a $104 billion deficit in 2020, assuming oil prices averages at $44 a barrel.
  • The IIF forecasts the region's weighted average fiscal deficit widening further from 3.4% of GDP in 2019 to 8.1% in 2020 and expects weighted average non-oil real GDP growth to decline from 2% in 2019 to 0.4% in 2020.
  • The decreasing oil price and Covid-19 pandemic has resulted in GCC facing cash crunch.
  • All GGC governments have responded with measures to protect liquidity in the banking sector by reducing day to day funding, however, this might not turnoutto be enough.

Detrimental effect of falling oil prices on credit ratings

  • Rating actions in 2020 by rating agencies on UAE companies in real estate, trade, retail, transportation, and hospitality sectors stems from pressure exerted on UAE Economy due to sharp drop in oil prices and reduced activity due to COVID-19.
  • Downward pressure on profitability and loan quality due to deteriorating operating condition and macro-economic factors. Bank’s asset quality deterioration will lead to increase in provision further exerting more pressure on the bottom-line.
  • According to rating agencies, the increased margin erosion and loan impairments in banks are leading to further credit rating downgrades of banks in the region.
  • The rating agency expects that loan quality should be tested, if loans are not performing then cost of risk will increase, weighing on banks’ profitability in the next 12-24 months.
  • Rating agency Moody’s said the sizable cut in interest rate will further reduce banks’ net interest margins (NIMs) because gross yields earned on loans will decline more than the funding cost paid on deposits.
  • The rate cut is unlikely to materially increase credit volumes in the current difficultoperating environment.
  • Downward pressure on profitability and loan quality due to deteriorating operating condition and macro-economic factors. Bank’s asset quality deterioration will lead to increase in provision further exerting more pressure on the bottom-line.
  • According to rating agencies, the increased margin erosion and loan impairments in banks are leading to further credit rating downgrades of banks in the region.
  • The rating agency expects that loan quality should be tested, if loans are not performing then cost of risk will increase, weighing on banks’ profitability in the next 12-24 months.
  • Rating agency Moody’s said the sizable cut in interest rate will further reduce banks’ net interest margins (NIMs) because gross yields earned on loans will decline more than the funding cost paid on deposits.
  • The rate cut is unlikely to materially increase credit volumes in the current difficultoperating environment.

Impact on banking sector due to regulatory relief by CBUAE

  • A number of regulatory reliefs announced by the Central Bank of UAE (CBUAE) will soften the impact of coronavirus (COVID-19) on the economy and the banking sector.
  • The new central bank measures include a Dh50 billion capital buffer relief, Dh50 billion zero-cost funding support, Dh95 billion liquidity buffer relief and Dh61 billion reduction-of-cash-reserves requirements for the banking sector.
  • The latest central bank program comes in the form of a 50 per cent reduction in reserves requirements for demand deposits (14 per cent to 7 per cent). This measure will inject liquidity of about Dh61 billion, which can be used to supportbanks’ lending and their liquidity management.
  • All banks will be allowed to tap into a maximum of 60 per cent of the capital conservation buffer, and banks will be able to use 100 per cent of their additional capital bufferfor systemic importance.
  • From 15 March 2020 and for a period of 6 months, CBUAE has waived all fees for the payment services provided to banks.
  • It also reduced the amount of capital banks have to hold for their loans to SMEs by 15 per cent and will increase the loan-to-value (LTV) ratios applicable to mortgage loans for first-time home buyers by 5 percent.
  • The new central bank measures include a Dh50 billion capital buffer relief, Dh50 billion zero-cost funding support, Dh95 billion liquidity buffer relief and Dh61 billion reduction-of-cash-reserves requirements for the banking sector.
  • The latest central bank program comes in the form of a 50 per cent reduction in reserves requirements for demand deposits (14 per cent to 7 per cent). This measure will inject liquidity of about Dh61 billion, which can be used to supportbanks’ lending and their liquidity management.
  • All banks will be allowed to tap into a maximum of 60 per cent of the capital conservation buffer, and banks will be able to use 100 per cent of their additional capital bufferfor systemic importance.
  • From 15 March 2020 and for a period of 6 months, CBUAE has waived all fees for the payment services provided to banks.
  • It also reduced the amount of capital banks have to hold for their loans to SMEs by 15 per cent and will increase the loan-to-value (LTV) ratios applicable to mortgage loans for first-time home buyers by 5 percent.

Impact of COVID-19 on Non-oil Sectors

  • The cowing effect that Covid-19, and measures to contain it, have had on travel, trade and business activity in general is expected to severely impact the UAE’s non-oil economy, which accounts for around 80 per cent of the country’s overall GDP.
  • To prop up the economy, the UAE Central Bank has announced a $27bn support plan for banks, while Dubai has announced $409m in direct stimulus for the energy, trade, retail and tourism sectors.
  • Individual government-related entities have also begun issuing support packages for their business partners and suppliers.
  • IHS Market UAE Purchasing Managers' Index (PMI) -- a composite indicator designed to give an accurate overview of operating conditions in the non-oil private sector economy dropped to a record low of 45.2 in March, from 49.1 in February, to signal a notable change in operating conditions at the end of the first quarter.
  • Decreased IHS Market UAE PMI is primarily due to imposed restrictions across the globe to contain the spread of the coronavirus outbreak.
  • This marked the third monthly decline in the health of the non-oil private sector in a row.
  • To prop up the economy, the UAE Central Bank has announced a $27bn support plan for banks, while Dubai has announced $409m in direct stimulus for the energy, trade, retail and tourism sectors.
  • Individual government-related entities have also begun issuing support packages for their business partners and suppliers.
  • IHS Market UAE Purchasing Managers' Index (PMI) -- a composite indicator designed to give an accurate overview of operating conditions in the non-oil private sector economy dropped to a record low of 45.2 in March, from 49.1 in February, to signal a notable change in operating conditions at the end of the first quarter.
  • Decreased IHS Market UAE PMI is primarily due to imposed restrictions across the globe to contain the spread of the coronavirus outbreak.
  • This marked the third monthly decline in the health of the non-oil private sector in a row.

Impact of COVID-19 on Tourism Sector

  • According to a 2019 report from the International Air Transport Association, air transportation accounted for $19.3 billion, or around 5% of the U.A.E’s GDP last year or Tourism contributed some 11.5% of Dubai’s GDP in 2019, with 89% of total travel and tourism spending in the emirate coming from international visitors.
  • All airlines will have to contend with cancellations as further flight restrictions come into effect. With global travel almost certain to be severely disrupted well into Q2 of 2020.
  • UAE airline industry is in much better condition than others, e.g., Air Arabia trailing 12 month quick ratio (liquid assets divided by current liabilities) currentlystands at 1.24 (below 1 are undesirable).
  • Dubai expo 2020 has been postponed by 1 year due to Covid-19, decision made by Bureau International des Expositions (BIE).
  • Being part of the hospitality industry for many years, UAE is in for a tough time if immediate support isn’t provided. e.g., during this time period generally hotel occupancy rates are 85% with average daily room rates close to Dh1,000. However, this year it is on the other end of the spectrum, wherein the occupancy rate is as low as 20% and room rates at Dh500.
  • All airlines will have to contend with cancellations as further flight restrictions come into effect. With global travel almost certain to be severely disrupted well into Q2 of 2020.
  • UAE airline industry is in much better condition than others, e.g., Air Arabia trailing 12 month quick ratio (liquid assets divided by current liabilities) currently stands at 1.24 (below 1 are undesirable).
  • Dubai expo 2020 going to postponed by 1 year due to Covid-19, decision made by Bureau International des Expositions (BIE).
  • Being part of the hospitality industry for many years, UAE is in for a tough time if immediate support isn’t provided. e.g., during this time period generally hotel occupancy rates are 85% with average daily room rates close to Dh1,000. However, this year it is on the other end of the spectrum, wherein the occupancy rate is as low as 20% and room rates at Dh500.

Impact of COVID-19 on Trade Sector

  • United Arab Emirates exports of goods and services as percentage of GDP is 93.86% and imports of goods and services as percentage of GDP is 67.98%.
  • China’s exports to the UAE amounted to $28.6 billion as of 2019, making it the largest importer for UAE.
  • Due to COVID-19 UAE has stopped all trade from china for the time being.
  • World trade is expected to fall by between 13% and 32% in 2020 as the COVID 19 pandemic disrupts normal economic activity and life around the world.
  • Nearly all regions will suffer double-digit declines in trade volumes in 2020, with exports from North America and Asia hit hardest.
  • Middle East and Africa export will be effected less as compared to other countries as they primarily export energy products, demand for which will have marginal decline and the pricing of Oil will affect the net income of the trade.
  • China’s exports to the UAE amounted to $28.6 billion as of 2019, making it the largest importer for UAE.
  • Due to COVID-19 UAE has stopped all trade from china for the time being.
  • World trade is expected to fall by between 13% and 32% in 2020 as the COVID 19 pandemic disrupts normal economic activity and life around the world.
  • Nearly all regions will suffer double-digit declines in trade volumes in 2020, with exports from North America and Asia hit hardest.
  • Middle East and Africa export will be effected less as compared to other countries as they primarily export energy products, demand for which will have marginal decline and the pricing of Oil will affect the net income of the trade.
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