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Introduction to UAE Economy and Key Sectors Outlook November 2, 2020
Speakers
Trevor Cullinan
Director
Sovereign Ratings
Dr. Mohamed Damak
Senior Director
Financial Institutions
Ratings
Sapna Jagtiani
Director
Corporate Ratings
UAE Economy and Sovereign Outlook November 2, 2020
Trevor Cullinan
Director, Lead Analyst GCC, Sovereign & IPF Ratings
Map of the United Arab Emirates (unrated)
Source: S&P Global Ratings, https://www.dubaimanufacturing.com/united_arab_emirates_maps_gulf_cities_middle_east_territory_map.htm
UAE Federation – Constitutional Issues
The federation was established on 2 Dec. 1971 comprising all Emirates except Ras Al Khaimah, who joined in Feb. 1972.
Up until now the president of the UAE has also been the ruler of Abu Dhabi (currently Sheikh Khalifa bin Zayed Al
Nahyan). The vice president and prime minister of the UAE has been the Ruler of Dubai (currently Sheikh Mohammad bin
Rashid Al Maktoum). The respective crown princes of Abu Dhabi and Dubai play increasingly important roles.
The Supreme Council is the supreme authority in the federation. It consists of the seven rulers of all the emirates, who
each have a single vote in the deliberations of the Council.
The Federal Council of Ministers (the Cabinet) is the executive authority for the federation and is responsible for
implementing policy decisions of the Supreme Council.
The Federal National Council (the FNC) is a parliamentary body which comprises 40 members who are UAE nationals.
Although the FNC can monitor and debate government policy, it has no veto or amendment power and cannot initiate any
legislation by itself. Since 2006, elections have been almost every four years for 20 elected positions on the FNC. The
most recent FNC elections were held on 5 Oct. 2019.
The UAE Federal Government is responsible for foreign affairs; security and defence; nationality and immigration;
education; public health; the currency; postal, telephone and other communications services; air traffic control and the
licensing of aircraft and a number of other matters including labour relations and banking.
5
Source: S&P Global Ratings, Government of Dubai Base Prospectus, 29 July 2020
UAE Federation – Constitutional Issues
Each emirate has its own government, consisting of departments or authorities, so that each emirate retains significant
political and financial autonomy. Each emirate manages its own budget on an independent basis and no emirate has any
obligation to contribute to the budget of any other emirate. Each of Dubai and Abu Dhabi make contributions to the federal
budget in agreed amounts
The governments of the seven emirates are authorised to regulate those matters that are not the subject of legislation by
the UAE Federal Government. The Constitution permits individual emirates to elect to maintain their own competencies in
certain sectors. Based on this flexibility, Dubai has elected to assume responsibility for its own education, public health
and judicial systems.
The natural resources and wealth in each emirate are considered to be the public property of that emirate.
There are three primary sources of law in the UAE, namely (i) federal laws and decrees (applicable in all seven emirates),
(ii) local laws and decrees (i.e. laws and regulations enacted by the emirates individually), and (iii) the Sharia (Islamic law).
The secondary form of law is trade custom or practice. In accordance with the Constitution, three of the seven emirates
(Abu Dhabi, Dubai and Ras Al Khaimah) have elected to maintain their own court system, separate from that of the UAE,
and these courts have sole jurisdiction to hear cases brought in the respective emirates.
6
Source: S&P Global Ratings, Government of Dubai Base Prospectus, 29 July 2020
UAE Economic Structure:
The emirate of Abu Dhabi has by far the largest economy in the UAE.
However, of total UAE population, about 9.8 million in 2019, 34% of people live in Dubai compared with 26% in Abu Dhabi.
The UAE as a whole is relatively well diversified compared with regional peers.
However, Abu Dhabi’s economy is concentrated on the hydrocarbon sector.
59
28
13
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Emirate's share of 2019 nominal GDP
Abu Dhabi Dubai
Other emirates*
25
41
15
75
59
99 95
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
UAE Abu Dhabi Dubai Other emirates*
Sectoral share of 2019 nominal GDP
Hydrocarbon sector Non-hydrocarbon sector
Source: S&P Global Ratings, National statistical authorities *Indicative. Calculated by subtracting Abu Dhabi and Dubai data from the UAE total.
Largest non-hydrocarbon sectors contribution to 2019 nominal GDP
UAE Economic Structure:
% of GDP UAE Abu Dhabi Dubai Other
emirates*
Wholesale and
Retail Trade
12.5 5.2 25.4 18.0
Manufacturing 8.7 6.3 8.7 19.9
Financial and
Insurance
activities
8.7 7.7 11.3 7.8
Construction 8.4 9.4 6.4 8.6
Public
Administration
and Defense;
6.8 7.0 6.9 5.6
Transportation
and Storage
5.9 2.9 12.2 6.0
Real Estate
Activities
5.2 4.2 6.1 8.0
8
Outside of its concentration in the hydrocarbon
sector Abu Dhabi is relatively well diversified.
Dubai is a regional trade, finance and aviation
hub. As a result it is particularly exposed to the
lockdowns and restricted travel related to COVID-
19.
The real estate sector is something of a bell
weather for the Dubai economy and has been
declining sharply in recent years.
The smaller emirates have large manufacturing
sectors. Sharjah is to some extent the
manufacturing base for lots of Dubai businesses.
Ras Al Khaimah has large quarries, which
supports one of the largest ceramics businesses
in the world.
Source: S&P Global Ratings, National statistical authorities *Indicative, calculated by subtracting Abu Dhabi and Dubai data from the UAE total.
UAE Economic Structure And Growth:
Oil wealth and a smaller population than Dubai makes Abu Dhabi much wealthier in economic terms.
We expect sharp declines in GDP across the emirates in 2020, followed by a modest recovery.
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
UAE Abu Dhabi Dubai Ras Al Khaimah Sharjah
GDP per capita, $ thousands
-12
-10
-8
-6
-4
-2
0
2
4
6
2019 2020 2021 2022 2023
%
Annual change in real GDP
UAE Abu Dhabi Dubai Ras Al Khaimah Sharjah
Source: S&P Global Ratings
Copyright © 2020 by Standard & Poor’s Financial Services LLC. All rights reserved.
UAE – External and Monetary Policy Considerations
External: There is only limited external trade, balance of payments, and international investment position data available for
the individual emirates. For the rated sovereigns, we therefore base our assessment of the emirate's external position on
that of the UAE, as the "host country" as per our definition. However, even then there are data gaps which restrict our
visibility on external risks.
We view the UAE’s external position as a credit strength due to its significant liquid external assets, which include our
estimate of assets held by sovereign wealth fund Abu Dhabi Investment Authority.
Monetary policy: The UAE dirham has been pegged to the U.S. dollar at 3.6725 since 1997. We view the UAE's monetary
flexibility as limited by the fixed exchange rate, which requires the UAE to track movements in the U.S. federal funds rate,
even when they may not be appropriate for domestic economic conditions.
We expect the UAE dirham's exchange-rate peg to the U.S. dollar will remain in place over the next several years. In our
view, the UAE has more than sufficient reserves to defend the peg, while considerations of macroeconomic and social
stability would also likely outweigh the potential benefits of amending the exchange-rate regime.
10
Source: S&P Global Ratings
Rated Emirates Fiscal Positions:
• Abu Dhabi has an extremely strong government balance sheet and has accumulated one of the largest net asset positions of all sovereigns we rate. We anticipate that, in the event of financial distress, the smaller emirates would receive extraordinary financial support from the UAE (with Abu Dhabi's backing). We estimate outstanding direct debt of the governments of Dubai, Ras Al Khaimah, and Sharjah at about 33% of Abu Dhabi's GDP in 2019.
• Ras Al Khaimah’s government balance sheet is largely balanced, while Sharjah’s government has taken on more debt in order to fund investment projects.
-300
-250
-200
-150
-100
-50
0
50
0 2 4 6 8 10 12 14 16N
et g
ener
al g
ove
rnm
ent
deb
t, %
GD
P
General government interest paid/General government revenues, %
Average government net debt and interest costs, 2020-2023
Abu Dhabi
Ras Al KhaimahSharjah
Source: S&P Global Ratings
Net debt position
Net asset position
November 2, 2020
Dr. Mohamed Damak
Senior Director, Financial Institutions Lead Middle
East and Africa
UAE Banks: Lower Profitability And Weaker Asset Quality
A large and multi-compartmented banking system
13
Two offshore centers (Dubai International Financial
Center and Abu Dhabi Global Markets) with the
presence of several large international players and
dedicated regulators.
57 onshore banks (17 national banks, 11 wholesale
banks, 1 investment bank and 28 foreign banks).
Foreign banks are authorized to conduct business
locally and raise deposits. Wholesale banks are only
authorized to serve corporates.
Top 10 banks represent around 85% of the system
and government owned banks represent around 65%
of the system.
One regulator for the onshore banks: the United Arab
Emirates Central Bank.
Good quality of regulation and supervision; adequate
transparency for banks (Basel III, IFRS, etc.)
Consolidated FI assets / GDP = 2.1X
COVID-19 and low oil price exacerbated the pressure…
14
Weaker macroeconomic environment, continued correction on the real estate sector, and negative impact of COVID-19
and low oil price on hospitality and commerce will weigh on Emirati banks asset quality indicators.
The decline is exacerbated by a fraud case in one large corporate and the recent liquidation of a major construction
company.
Regulatory forbearance measures will delay the recognition of the problems to 2021.
NPLs are rising, coverage is broadly stable Credit losses will increase
Source: S&P Global Ratings
Copyright © 2020 by Standard & Poor’s Financial Services LLC. All rights reserved.
% %
0
0.5
1
1.5
2
2.5
2014 2015 2016 2017 2018 2019 2020 2021 2022
Credit losses as a % of total loans
0
20
40
60
80
100
120
140
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
2014 2015 2016 2017 2018 2019 2020 2021 2022
NPLs / Total Loans
NPLs coverage by LLRs Credit losses as a % of total loans
But most of the banks will remain profitable in 2020-2021
15
Higher cost of risk and lower margin will
result in lower profitability for 2020-
2021.
Margin is expected to decline because
of lower for longer interest rate policy of
the FED (and the peg).
However, we expect most of the banks
to still show positive results in 2020.
Some banks might display losses due to
their exposure to high risk asset classes
or under provisioning.
Banks will continue to benefit from their
strong efficiency explained by fairly low
cost of labor, absence of taxes or social
levies, and relatively small branch
networks.
Lower profitability could prompt more
consolidations or more collaboration
with Fintech to curb costs.
The system will remain profitable
Source: S&P Global Ratings, Central Bank of UAE
Copyright © 2020 by Standard & Poor’s Financial Services LLC. All rights reserved.
%
34.0
34.5
35.0
35.5
36.0
36.5
37.0
37.5
38.0
38.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2014 2015 2016 2017 2018 2019 2020*
Return on Assets (LHS) Interest Margin (LHS) Cost / Income (RHS)
And they are well capitalized and mostly locally funded
16
External funding contribution is limited and the banking system is in net external asset position overall. This is by choice
and not so much because access to international capital is not possible.
Banks are highly capitalized on average. Over the past five years, most of capital raising exercise were done in hybrid
forms.
Funding is dominated by core sources with
limited external funding contributionCapital is strong quantitatively and qualitatively
Source: S&P Global Ratings
Copyright © 2020 by Standard & Poor’s Financial Services LLC. All rights reserved.
% %
-8
-6
-4
-2
0
2
4
6
8
85
86
87
88
89
90
91
92
93
2014 2015 2016 2017 2018 2019 2020
Net external debt / Domestic loans (RHS) Loan / Deposits (LHS)
10
12
14
16
18
20
22
24
26
28
2014 2015 2016 2017 2018 2019 2020
Min Tier 1
Average Tier 1
Max Tier 1
Overall the risk profile is average
Starting point for the rating of a bank operating in the UAE is “bbb-” – Negative trend on ER and
IR for expected increase in credit losses and relaxation of some prudential regulations.
Weaknesses
Increasing credit losses due to weak economic
environment.
Still fragmented banking sector with high price
competition.
High sector and single-name concentrations.
Strengths
High-income levels and a strong fiscal and
external position.
Relatively more diversified economy than Gulf
Cooperation Council (GCC) peers.
Funding profile dominated by stable core
deposits.
November 2, 2020
Dr. Mohamed Damak
Senior Director, Financial Institutions Lead Middle
East and Africa
Islamic Finance: COVID-19 is an opportunity for the transformation of the industry
COVID-19, oil, and volatility: the perfect shock
19
We expect major economic slowdown in core countries followed by a mild recovery.
Several central banks in core Islamic countries reacted, opening liquidity taps and introducing more flexibility in capital adequacy
ratio calculation to keep lending for corporates…
A sharp economic contraction followed by a
mild recovery
Source: S&P Global Ratings, Eikon
Copyright © 2020 by Standard & Poor’s Financial Services LLC. All rights reserved.
Which will put pressure on the industry
growth for 2020-2021$ Bil.%
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
2014 2015 2016 2017 2018 2019 2020 2021
GCC Malaysia Turkey IndonesiaC
0
500
1000
1500
2000
2500
2014 2015 2016 2017 2018 2019e
Banking Assets Sukuk Takaful Funds
Affecting all the components of the IF industry
20
- We expect low-to-mid single digit
growth of the Islamic banking assets.
Corporates are reducing capital
expenditures and going for banks’
financing at subsidized rates. Banks
have cut their growth expectations and
reduced their risk appetite.
- Takaful will see a mid-single digit
growth while funds will be impacted by
the capital market volatility.
- We expect sukuk issuance to decline
in 2020. The fact is that the market is
already down by 14.4% and we expect
the drop to continue.
Source: S&P Global Ratings, International Monetary Fund, Eikon
Copyright © 2020 by Standard & Poor’s Financial Services LLC. All rights reserved.
Sukuk issuance dropped
$ Bil.
0
20
40
60
80
100
120
140
160
180
2014 2015 2016 2017 2018 2019 Sep-19 Sep-20
Total Issuance Reopening
The slowdown of sukuk issuance will continue
21
Better than expected market conditions resulted in a higher volume of issuance in foreign currency vs. last
year. Overall, we still expect the overall amount of issuance to be lower than 2019.
FX issuances were supported by sovereigns, multilaterals and banks primarily. Corporates are not issuing.
Most of the issuances are still in LC
Source: S&P Global Ratings, Eikon
Copyright © 2020 by Standard & Poor’s Financial Services LLC. All rights reserved.
$ Bil.
0
20
40
60
80
100
120
140
2017 2018 2019 Sep-19 Sep-20
LC FC
A handful of countries are issuing in FC
0
1
2
3
4
5
6
7
8
9
10
Bahrain Indonesia Kuwait Malaysia Qatar SaudiArabia
Turkey UAE
Sep-19 Sep-20
Why?
22
Core Islamic finance countries central banks opened liquidity taps locally and asked local banking
systems to lend to corporates – Lower financing needs for the corporates
Central banks will have no reasons to issue this year. They accounted for 17.5% of total issuance last
year and they are now providing liquidity instead of taking it – No or limited Issuances from CB.
Investors sentiment has changed and risk aversion has increased in the first four months of 2020. We
have then observed a reversal in sentiment explained also by the strong global liquidity.
Sukuk issuance is more complex than conventional bonds. We saw several governments from core
countries tapping the conventional markets instead. We think that most issuance in 2020 will either
occur under existing programs or in form of tap issuances.
A niche market with limited involvement of non core countries
23
The market is a niche rather an a mainstream market as shown by its significant concentration by
geography (GCC and Asia account for more than 90% of issuance volumes).
It is diversifying though. We saw few non-core issuers tapping the market (UK, Luxembourg, South Africa,
Goldman Sachs, General Electric Capital Corp, etc.).
The market remains highly concentrated
Source: S&P Global Ratings, Eikon
Copyright © 2020 by Standard & Poor’s Financial Services LLC. All rights reserved.
%
39%
38%
36%
43%
42%
41%
41%
35%
15%
14%
15%
11%
3%
7%
9%
11%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
2017
2018
2019
Sep-20
GCC countries Malaysia Other Asia Other Countries
Can Sukuk help Israeli issuers?
24
Market perception S&P opinion
Investors diversification True: Sukuk allow to attract investors that do no
invest in conventional bonds such as Islamic
banks, Takaful companies, Islamic asset
managers, etc. However, the total size of the
industry is relatively small ($2.4 trillion at YE
2019) and total investible assets in sukuk
estimated to around $500 billion.
Asset backing principle means that sukuk can be
a good instrument for infrastructure financing or
asset backed transactions
Incorrect: 99.9% of the market today is made of
structures that resemble to senior unsecured
instruments. There is a limited appetite for
project finance sukuk or asset backed sukuk.
Pricing can be cheaper than conventional bonds. Depends: on the issuer and the market appetite
but it is true that sometime sukuk issuance lead
to significant oversubscription which can
translate to a pricing advantage.
Sukuk are easy instruments to issue. Incorrect: Sukuk are usually more complex that
conventional instruments and necessitate
specific regulatory framework.
November 2, 2020
Sapna Jagtiani
Director, Lead Analyst, GCC Corporate RatingsAn Introduction to the UAE and the Larger GCC Corporate Market
UAE Companies Are Most Active In GCC Debt Capital Markets
76%
25%
66%
46%52%
63% 63%
18%
75%
11%
36%
38% 20%
32%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2014 2015 2016 2017 2018 2019 2020
Sh
are
in
Is
su
an
ce
Other KSA UAE
9.3
1.5
3.0
6.0 5.7
3.1
8.3
1.0
0.5
1.8
3.83.8
3.7
1.2
0.0
2.0
4.0
6.0
8.0
10.0
12.0
2014 2015 2016 2017 2018 2019 2020 To Date
Iss
ua
nc
e (
$ b
ln)
Private Sector GA
GRE issuers represent the bulk of the market
Non Financial Corporates – Public Bond Issuance UAE and KSA based issuers represent the bulk of GCC
Corporate Bond Issuance
UAE Equity Capital Markets Aren’t As Exciting
26.02 7
5 5
3
4
2 2
1
4
3
0
1
2
3
4
5
6
7
8
-
5.00
10.00
15.00
20.00
25.00
30.00
Q42017 Q12018 Q22018 Q32018 Q42018 1Q2019 2Q2019 3Q2019 4Q2019 1Q2020
Co
un
t$ b
ln
Amount Raised - $ bln Number of IPOs
Saudi Aramco was the only large deal over the past 3 years
0 500 1,000 1,500 2,000 2,500 3,000
Saudi Arabia
Dubai (only DFM)
Abu Dhabi
Qatar
Kuwait
Oman
Bahrain
Volumes - $ mln
Outside KSA, very limited trading, and is dominated by retail
GCC IPO Market (2017 – To Date) 3 Months Average Trading Volumes in Equities
A Snapshot Of GCC / UAE Corporate Portfolio
7
4
1
3
5
2
4 41
3
0
2
4
6
8
10
12
14
Oil & Gas Real Estate Utilities Telecom IHCs Others
Co
un
t
GRE Non GRE
4
3
1 1 1
1
2
1
1
1
2
0
1
2
3
4
5
6
Oil & Gas Real Estate Aviation BusinessServices
Education Industrials Telecom Utilities
Co
un
t
GRE Non GRE
Sectoral Breakdown of the GCC Portfolio Sectoral Breakdown of the UAE Portfolio
GCC Country And Sector Vulnerability Matrix
0
4
8
12
16
20
2014 2015 2016 2017 2018 2019
Annual Foreign Visitors in Dubai (mln)
Tourism Is Key To Dubai
0 20 40 60 80 100 120
Atlanta,…
Beijing,…
Los…
Dubai, AE…
Tokyo, JP…
Chicago,…
London,…
Shanghai,…
Paris, FR…
Dallas Fort…
World's busiest airports by number of passengers 2019Dubai:1 st in international passengers and 3rd in total
Dubai Is An Important Trade Hub
31
0 5 10 15 20 25 30 35 40 45 50
Shanghai
Singapore
N-Zhoushan
Shenzhen
Guangzhou
Busan
Qingdao
Hong Kong
Tianjin
Dubai
The largest container ports worldwide in 2019, based on throughput (in million TEUs)
C
0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000
H. Kong, HKG (China)
Shanghai, PVG (China)
Incheon, ICN (S. Korea)
Dubai, DXB (UAE)
Doha, DOH (Qatar)
Taipei, TPE (Taiwan)
Tokyo, NRT (Japan)
Singapore, SIN
Leading airports for international air freight 2019 (Thd metric tons)
Dubai has the largest container port outside Asia Dubai has the largest air freight activity outside Asia
November 2, 2020
Dubai Real Estate Market OutlookSapna Jagtiani
Director, Lead Analyst, GCC Corporate Ratings
COVID-19 An Additional Drag On Dubai's Oversupplied Real Estate Market
Most impacted sector: Negative rating actions on 4 of the 5 companies we rate and only 2 of these ratings are on stable
outlook
Key Pressures
Residential: lower pre-sales, increased pressure for discounts or other incentives, and possibly slower cash collections
leading to higher working capital requirements
Retail: material revenue and EBITDA weakening due to rent-relief measures, lower footfall decline in tourists and
social-distancing measures and low consumer confidence affecting discretionary spending
Office: rental pressure and lower occupancies as tenants continue to rationalize fixed costs and staff
Hotels: Global travel restrictions, no corporate travel and limited recovery in tourist arrivals
33
Aviation And Tourism Have Been Hardest Hit
34
Dubai is particularly exposed as Dubai International Airport is one of the busiest in the world, and aviation and its subsectors are key employers
in the Emirate, which received over 16.7 million tourists last year.
60
70
80
90
100
300
350
400
450
500
550
600
2015 2016 2017 2018 2019
Ave
rag
e O
cc
up
an
cy L
eve
ls %
Ave
rag
e D
ail
y R
ate
s -
$
Average Daily Rates - $ Average Occupancy %
0
3
6
9
12
15
India KSA UK Oman China Russia USA
Sh
are
in
To
tal (%
)
Tourists by NationalityC
Dubai Hotels – Key Statistics Share in Tourism in Dubai by Nationality (2017-2019 Averages)
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