Global Arab Network | Moody’s: Abu Dhabi's Support to Dubai Provides Temporary Relief

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Moody’s: Abu Dhabi's Support to Dubai Provides Temporary Relief

Global Arab Network - - George Haddad

Monday, 21 December 2009 12:57

Last Monday, after securing a second USD10 billion loan from Abu Dhabi, the government of Dubai extended emergency support to entities within the Dubai World Group (a Dubai government undertaking) to help them meet their immediate debt obligations. Abu Dhabi’s last-minute intervention averted a further deterioration of already challenging conditions in Dubai. However, the underlying financial and economic problems of Dubai remain. Despite ongoing support from the Central Bank of the UAE, the credit quality of UAE banks that operate primarily in Dubai has been weakened, according to "Moody's Weekly Credit Outlook"

The final form of the on-going restructuring of Dubai World debt has yet to be defined. It is also not clear whether the restructuring will be confined to Dubai World entities or if it will also include other government-related institutions. Finally, uncertainty still surrounds the implementation of the promised comprehensive reorganization and its impact on the ultimate level of debt recovery. While these uncertainties are further negative credit factors added to the losses that Moody's expects Dubai-based banks to incur in the near future, Moody's continues to view the Federal government’s willingness to provide assistance to its banking system as justifying investment-grade ratings on Dubai banks’ long-term deposit and senior debt.

Repercussions of the global crisis hit Dubai-based banks particularly hard, resulting in wider liability spreads, sharply reduced business growth and a worrying increase in non-performing assets exposed to the property sector, small-and-medium sized companies, over-stretched corporates, as well as highly-leveraged individual borrowers. These trends are reflected in the banks’ 2009 performance results. The likelihood of a continued deterioration in the already weakened corporate sector in Dubai remains high.

The difficult economic conditions in Dubai will likely lead to a further rise in distressed loans over the foreseeable future, thus testing the resilience of the banks' credit quality. In addition to their exposure to Dubai government-related institutions, Dubai-based banks’ exposure concentrations to the construction and real estate sectors are significant, and could entail material losses. Although our stress-testing scenarios suggest that these banks have adequate capital buffers to absorb an increased level of bad debt, their earnings could be dented.

In addition, Moody's is concerned about the longer-term repercussions of the reduced market confidence on the banks’ ability to tap market funding at reasonable cost. Moody's expects that funding support will be provided by the authorities to banks that may require it, but that UAE banks will end up with greater dependence on funding from local authorities.

Moody's believes that the Central Bank of the UAE will remain vigilant and continue to provide support where needed. However, Moody's observes that this could represent an opportune moment for consolidation of the crowded UAE banking market. Mergers and acquisitions would result in bigger and more diversified players with larger capital bases and better prospects to survive over the longer term.

Global Arab Network

Extracted from "Moody's Weekly Credit Outlook"

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