UAE GDP Growth Expected To Remain Strong Through 2027, Supported By Non-Hydrocarbon Sectors And Business-Friendly Policies

The UAE's banking sector is thriving due to a robust domestic economy, leading to better asset quality and reduced credit losses. An S&P Global Rating report predicts these improvements will persist into 2025. The agency expects the UAE's economic growth to remain strong, driven by increased hydrocarbon production and vibrant non-hydrocarbon activities.

"As hydrocarbon production picks up, we anticipate that real GDP growth will remain strong in 2025-2027, further supported by buoyant non-hydrocarbon activity. Business-friendly regulations and a low corporate tax regime, a simplified visa regime, and the success of long-term residency visas will continue to fuel new businesses and increase the population in the country. Despite potential vulnerability to sudden increases in regional geopolitical tensions and significant drops in oil prices, we believe that economic risks will remain manageable, supported by demonstrated resiliency during past periods of lower oil prices and heightened geopolitical instability."

The report highlights that UAE banks are expected to maintain stable capital buffers and strong funding profiles. Government support is also anticipated to bolster their resilience against potential regional geopolitical tensions and oil price fluctuations. Despite these challenges, the risks are considered manageable.

UAE banks have experienced a notable rise in deposits over the last three years. This trend is expected to sustain their growth momentum. The easing of monetary policy and a supportive economic environment are projected to drive strong lending growth into 2025.

The report anticipates continued improvement in banking asset quality. Non-performing loans and credit losses are expected to stay low due to solid performance in non-oil sectors and anticipated rate cuts. Banks have used high profitability over recent years to provision for legacy loans, reducing stage 3 loans significantly.

"We anticipate UAE banks’ non-performing loans and credit losses will remain low because the solid performance of the non-oil sectors and expected rate cuts will help improve underlying asset quality. Over the past two years, banks used their high profitability to set aside provisions for legacy loans and have written them off, resulting in stage 3 loans for the 10 top banks (accounting for 85% of banking system) dropping to 4% of gross loans as of Sept. 30, 2024, down from the peak of 6.1% in 2021. In addition, the improved economic environment has meant higher recoveries of written-off loans, contributing to lower net credit losses."

Profitability Trends

The agency notes that UAE banks' profitability improved with previous monetary tightening as higher interest rates expanded margins. However, with declining interest rates expected ahead, profitability might decrease slightly but should remain high compared to previous peaks.

"We now expect profitability to follow amid declining interest rates. We expect the cost of risk to remain low, and therefore UAE banks’ profitability should remain high, albeit lower than the peak of 2023."

The positive trend in economic risk is attributed to robust non-oil sector performance improving asset quality indicators within the banking system while reducing credit losses.

With inputs from WAM