News Column

UAE gets strong report from the International Monetary Fund

June 15, 2014



An International Monetary Fund (IMF) mission visited the United Arab Emirates from April 23 to May 8, 2014, to hold discussions for the 2014 Article IV consultation. Against the backdrop of a strengthening economic recovery, discussions focused on pursuing appropriate macroeconomic policies, mitigating potential risks from real estate and Government-Related Entities (GRE), and pursuing policies to further strengthen financial sector stability.

Amid ample liquidity in the banking system, private sector credit has begun to recover, said the IMF. Deposit growth has substantially strengthened, boosting liquidity in the banking system. Following years of credit-less recovery, lending to the private sector has begun to rebound (8.2 per cent year-on-year growth in 2013, and further accelerating in the first quarter of 2014). Banks continued to increase their exposure to government and public enterprises, by AED 15 billion (equivalent to six percent of bank capital) during 2013, in some cases further increasing their already substantial loan concentration. Non-performing loans have begun declining from their post-crisis peak but remain high especially among Dubai banks. The banking system remains amply capitalised (capital adequacy ratio of 18.5 per cent as of March 2014), and stress tests conducted by the Central Bank of the UAE (CBUAE) show that the domestic banking system could absorb significant capital and liquidity shocks.

Risk management

The IMF also commented on the need for further strengthening measures to discourage speculation in order to help mitigate the risk of a boom and bust cycle. The increase in Dubai's real estate registration fee from two to four per cent last October, along with regulatory measures to assure orderly market conditions for new real estate development, was a welcome step, the IMF said. Imposing additional fees and restrictions on reselling off-plan properties, as currently under consideration, would further discourage speculative demand. In addition, setting higher fees for reselling properties within a relatively short time would be useful. International experience shows that countries faced with real estate booms often repeatedly raised real estate fees and differentiated them by criteria such as the buyer's residency, use of the property for occupancy or investment, or the time elapsed before reselling, with rates reaching up to around 30 per cent for selected types of properties resold within a year.

The IMF also noted that the new maximum loan-to-value ratios for mortgage lending and debt-service-to-income limits help provide banks with a buffer against undue exposures, while also helping to limit the degree of speculation in the real estate market. Looking ahead, the CBUAE could consider further tightening these rules if price increases in the real estate market remain very large and if growth in real estate lending continues to increase. International experience shows that countries faced with real estate booms often repeatedly tightened macroprudential regulations such as loan-to-value limits, debt-service-to-income ratios, and risk weights for real estate lending.

The IMF warned the recent pick-up in private credit growth amid ample liquidity in the banking system warrants close monitoring. Should credit growth accelerate significantly, tightening macroprudential regulations, such as tightening the advances-to-stable-resources ratio, capital adequacy ratio, risk weights for lending, or raising reserve requirements on time deposits, could be appropriate to preempt potentially excessive risk-taking. The recently introduced loan concentration limits for GREs and local governments will help contain risks to banks' balance sheets in the context of the newly planned megaprojects. It will now be important to agree, as planned, on transition paths for banks that are currently not meeting the new limits, while avoiding any further build-up of exposures for these banks. In light of the high degree of interconnectedness between bank board members, who are also members of the boards of GREs and private sector enterprises, close adherence to best practices in corporate governance and risk management in the banking sector is needed to safeguard the independence of banks' decision making. More broadly, ongoing monitoring and reporting of risks, including through the CBUAE's financial stability reports, is important. Reviewing the responsibilities for financial sector regulation and supervision in the context of the planned financial services law will also be helpful.


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Source: CPI Financial


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