UAE banking system is robust, can withstand severe shocks: Central Bank report

Abu Dhabi: Banks in the UAE have adequate capital and liquidity buffer to withstand severe shocks, the Central Bank said in a report on Thursday.

The banking system also has a robust payment system that kept pace with rapid digitisation of the financial services sector and withstood cyber resilience tests.

Releasing the Financial Stability Report, the Central Bank outlined the steps it has taken to support the national economy during the Covid pandemic, including the gradual exit from the Targeted Economic Support Scheme (TESS). The first phase completed by the end of 2021, and the second phase concluded by the end of June 2022. The Central Bank will maintain the final third phase of TESS measures during the second half of 2022.

The regulator also conducted risk-based supervision, and solvency and liquidity stress tests to assess potential vulnerabilities, which indicated that the country’s banking system remained sturdy.

The report also outlines the risks for the banking system, which stem from the potential deterioration of assets quality and insufficient change in banks’ business models in light of the global digital transformation, climate change and the rising governance requirements.

Khaled Mohamed Balama, Governor of the Central Bank of the UAE, said: “The Financial Stability Report records the CBUAE’s approach to identifying and mitigating potential systemic risks and safeguarding the stability and resilience of the UAE financial sector. The report projects a positive outlook for the country’s economy and financial system in 2022.

“The global macro-financial outlook, however, could be affected by supply chain disruptions, rising inflationary pressures, and further escalating geopolitical tensions. We will continue to monitor evolving global vulnerabilities closely and stand ready to take additional measures if needed.

“The CBUAE’s vision is to become among the top central banks globally in enhancing monetary and financial stability and supporting UAE’s competitiveness. We share this determination with the UAE leadership and licensed financial institutions, and together we are implementing an ambitious transformation strategy to achieve this.”

Growth forecast

The UAE’s overall real GDP increased by 3.8 per cent in 2021, compared to a decline by 4.8 per cent in 2020, the UAE Central Bank said. The overall GDP growth is due to an increase by 5.3 per cent in non-oil real GDP, marginally dragged down by the drop in the real oil GDP. The Central Bank projects real GDP growth to further increase to 5.4 per cent in 2022, supported by higher economic activity and higher oil prices, with non-oil GDP rising by 4.3 per cent while forecasts for growth for 2023 for the overall real GDP and the non-oil real GDP are 4.2 per cent and 3.9 per cent, respectively.

The TESS programme

The Central Bank implemented comprehensive broad-based measures under the Targeted Economic Support Scheme (TESS) to mitigate the financial and economic repercussions of the pandemic. TESS helped in cushioning the negative impact of the pandemic and in facilitating the economic recovery throughout 2021.

It mitigated liquidity and funding pressures and preempted unwarranted asset quality deterioration due to temporary cash-flow constraints of affected household and corporate borrowers.

Exit strategy

As the economy recovered, the focus of the TESS shifted from crisis management towards a gradual winding down of the scheme while supporting sustained economic recovery.

The first phase of the exit strategy focused on the gradual unwinding of the TESS deferral programme, which was phased down to 50 per cent by September 30, 2021, and phased out fully by December 31, 2021.

The second winding down phase ended on June 30, 2022. The final phase of the programme is expected to end by December.

The TESS programme benefited more than 322,000 bank clients affected by the pandemic, covering individual borrowers, SMEs and corporates. The programme supported up to 15 per cent of total bank loans/financing at the peak of the pandemic.

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