S&P Global Ratings forecasts the UAE’s real GDP to grow by 5.3 percent in 2024, versus 3.4 percent in 2023. In its latest report, the credit ratings agency attributed this growth to various factors, including bolstered oil production and thriving non-oil sectors.
Banking sector’s outlook
S&P Global also noted that UAE banks reported exceptional profits in 2023. That is due to lower provisioning requirements and higher interest margins. Moreover, they witnessed improved liquidity levels as deposit growth outpaced new loan growth. The increase in net profit was also supported by growth in non-interest income, reflecting increased business activity and commercial activity. The report also noted that the outlooks for the banks in the UAE are stable.
Non-oil sectors pave the path for growth
While oil production remains a cornerstone of the UAE’s economy, S&P emphasized the growing influence of non-oil sectors in propelling economic expansion. Notably, it expects sectors such as hospitality, real estate, and financial services to play pivotal roles in driving the nation’s non-oil GDP forward. This diversification underscores the UAE’s commitment to mitigating dependency on oil revenues and fostering a more sustainable economic landscape.
Interest rate dynamics
In addition, S&P highlighted that the U.S. Federal Reserve‘s interest rate adjustments hold implications for the UAE’s monetary policies, given the dirham’s peg to the U.S. dollar. With expectations of a 100-basis-point rate cut in the latter half of 2024, the agency foresees a corresponding move by the Central Bank of the UAE. This forecast, coupled with expectations of prolonged higher interest rates, bodes well for UAE banks. Hence, it bolsters their net interest margins and overall profitability. The agency also expects retail lending to remain strong as banks continue to expand in this profitable segment.
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Liquidity and asset quality
Highlighting the robust fundamentals of UAE banks, S&P points to their substantial liquidity reserves. Cash and money market instruments averaged 21.8 percent among the ten largest banks by the end of 2023. Moreover, the steady 12 percent growth in core customer deposits last year, and limited reliance on external funding fortifies the banks’ funding structures. The notable 27.9 percent rise in net foreign assets as of 30th November 2023 further underscores the resilience and global outlook of UAE banks, reflecting a positive trend in asset quality.
As the UAE charts a course toward economic prosperity, S&P’s optimistic projections are a testament to the country’s economic efforts. With a resilient banking sector, buoyant non-oil industries, and strategic monetary policies, the UAE appears poised to navigate challenges and capitalize on opportunities, reinforcing its position as a global economic powerhouse.
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