The International Monetary Fund warned the United Arab Emirates and other Gulf countries could face major financial repercussions if the eurozone contagion spreads across global markets.
The global financial institution said in a report that countries depending on foreign financing and having financial links to Europe will face serious risks and difficulties. The report was prepared in April after consultations with the UAE and released in June.
“While vulnerabilities have decreased since 2008, the results of this analysis nonetheless suggest that the (UAE) authorities need to remain vigilant to global shocks and continue to strengthen buffers,” the report said.
However, the IMF noted that the UAE’s banking system is moderately exposed to Europe. The report highlighted that the country’s foreign liabilities are about 19% of its total liabilities, while about 20% of UAE’s banking system assets are held by the Europeans.
“While the estimated level of financial spillovers to Dubai is once again increasing, it is still below 2008-09 levels. European countries, Greece in particular, have been key contributors.”
The IMF report said the UAE’s banking system has not shown any distressing signs till now, while noting that the probability of all Emirati banks experiencing large losses simultaneously was very low.
However, the report added that the results of the analysis demonstrate that risk remains concentrated in a few banks; and stronger supervision will be needed to closely monitor their cross-border and domestic interbank exposures.
“While the funding situation of local banks has stabilised, a foreign funding shock could generate some liquidity tightening in the banking sector,” the report said.
“Although financial vulnerabilities of the United Arab Emirates have decreased since the 2008 global real estate collapse, given the UAE’s interconnectedness, it remains exposed to global financial conditions,” the IMF insisted.
The Paris-based institution says the UAE will come under strain if euro zone governments and banks struggle to fund themselves. Dubai, the financial capital of the UAE and the Gulf region, is still recovering from its 2009-2010 corporate debt crisis despite posting solid economic performance last year.
The IMF also predicted that deterioration of the UAE banks’ asset quality would be witnessed this year, giving a rise to the number of bad loans although the damage would be limited as banking sector capable of handling a significant increase.
The financial study also revealed that seven out of 26 listed companies in the UAE’s real estate sector, with total liabilities of $12 billion, are operating under heavy losses or do not have sufficient operating income to service their debt.
“Italy, Portugal, and Spain are also contributors: these four countries explain close to 80 per cent of the contagion risk to Dubai,” the IMF report underlined.