Powering Ahead

an upside risk to growth and the federal government is leaving no stone unturned in its efforts to diversify the economy away from heavy reliance on oil revenues.

The UAE has remained relatively insulated from the global economic downturn with the Gulf state projected to maintain above-average growth in 2023 to become the best-performing economy in the Middle East region. Economies around the world have been grappling with a multitude of shocks—from the war in Ukraine to soaring COVID-19 cases in China—that have sent inflation soaring and weakened activity.

The International Monetary Fund (IMF) forecasted that global GDP growth will slow from 6% in 2021 to 3.2% in 2022 and 2.7% in 2023—the weakest growth profile since 2001. Meanwhile, the UAE enjoyed a strong finish to 2022 led by a strong economic rebound on higher oil prices and production as well as the recovery in tourism, construction and non-oil activity linked to the Expo 2020 Dubai.

“Looking ahead, the UAE economic outlook remains positive supported by domestic activity,” the IMF said last November while projecting that GDP growth will reach 5.1% in 2023 and nonhydrocarbon growth is forecasted to be around 4%.

Though the world’s largest economies face heightened recession risks, the UAE’s strong reform momentum provides

The UAE, the Middle East’s leading business and tourism hub, has introduced a series of reforms over the past few years to increase foreign direct investment and make itself more attractive for foreigners to live and work amid growing competition from its GCC neighbours.

The performance of the UAE’s banking system improved last year on the back of lower cost of risk and higher interest rates and profitability is expected to reach pre-pandemic levels in 2023. However, the increasing risk of recessions in the US and Europe along with higher interest rates could pressure the operating environment.

Financial Matrix

Banking sector

UAE banks are entering 2023 ‘on solid footing’ despite higher uncertainty.

Banks in the Emirates reported higher profits on the back of improving operating conditions marked by economic recovery and the central bank’s moves to tighten monetary policy.

“Banks’ performance improved in 2022 on the back of lower cost of risk and higher interest rates,” S&P Global said in January while noting that the central bank’s Targeted Economic Support Scheme (TESS) helped the banking system through a period of stress, limiting the increase in nonperforming loans (NPLs). The benefits are expected to continue this year.

The combined profits of the UAE’s top five banks—First Abu Dhabi Bank (FAB), Emirates NBD, Dubai Islamic Bank (DIB), Abu Dhabi Commercial Bank (ADCB) and Mashreq Bank—reached $8.5 billion (AED 31.4 billion) in the nine months of 2022.

FAB, the UAE’s largest lender by assets, reported a 19% increase in 9M 2022 net profits to nearly $3 billion (AED 10.9 billion), Emirates NBD registered a 25% y-on-y increase in profit to $2.5 billion (AED 9.1 billion), DIB’s net profit soared by 34% to nearly $1.11 billion (AED 4.1 billion), ADCB saw it net profits in the nine months to the end of September jump by 22% y-on-y to $1.3 billion (AED 4.7 billion) while Mashreq’s net profit reached $708 million (AED 2.6 billion).

S&P Global said that net interest income—the difference between interest revenues earned from lending activities and interest paid to depositors—at UAE’s banks has soared over the quarters as lenders are passing rate increases on to customers.

The Central Bank of the UAE (CBUAE) hiked its base rate by fifty basis points to 4.4% in December after the US Federal Reserve raised its interest rate by half a percentage point marking one of the most aggressive years in monetary policy history as central banks heightens their fight against inflation.

The UAE’s financial institutions have adequate capital overall and abundant liquidity while their asset quality has improved modestly from pandemic-era peaks. However, pressures on small banks’ profitability, alternative delivery channels and competition from digital banks are expected to increase shareholders’ appetite for consolidation to enhance the resilience of banks’ financial profiles.

Digital banking is swiftly changing the field of play in the UAE financial services sector where incumbents are facing increasing competition from neobanks and challenger banks which are billing on customer experience as their point of sale.

KPMG said that financial regulators are keen to align the country’s digital agenda with the country’s banking industry operations as neobanks, like the homegrown Zand, are focusing on

Digitalisation in the UAE financial service market is partly being driven by tech-savvy customers and regulatory initiatives such as regulatory sandbox and open banking—which are creating an enabling environment.

Fiscally fit

The disruptions to oil trade and output that followed the war in Ukraine have driven up the cost of commodities while contributing to cost-of-living crises around the world. However, in the UAE, the oil boom has had the effect of pushing budgets into the black after the economic impact of the pandemic while creating an ideal environment for the country to proceed with ambitious reforms under