While most countries are stuck with lock-downs to smother the pandemic, the UAE chose to remain open. Will the gamble pay off economically?
Remember life before Covid-19? Booking hotel rooms for holidays, eating out at the restaurant, partying in bars and going to the gym? While this is a distant dream in most countries experiencing lockdowns, in Dubai, life continues almost unchanged. A social media campaign makes the point: “Open is looking good for Dubai right now and we want to tell the world about it,” says the voiceover, accompanied by images of unmasked people riding a rollercoaster, shopping at the mall and running on the beach.
After a first lockdown last spring, the United Arab Emirates chose to reopen to business and tourism. Anyone can travel to Dubai with a negative PCR (polymerase chain reaction) test taken no more than 72 hours before departure. Upon arrival, another PCR test is compulsory at the airport; with a negative result, travellers are free to roam the streets, shop and attend business meetings. To attract foreigners, Dubai is even issuing one-year “remote work” visas to digital nomads looking for a nice environment to put down their suitcases and laptops.
The UAE, of course, hopes that this will boost growth. Government sources report that the economy contracted by 6% in 2020 under the twin blows of the pandemic and lower oil prices. Abu Dhabi, the only emirate with substantial oil reserves, remains more difficult to access, but the six others, including Dubai, rely heavily on tourism.
“Going into 2021, Dubai will continue to strengthen its offering for business and leisure visitors with the launch of new facilities and attractions as well as the return of world-class conferences, events and festivals,” Helal Saeed Almarri, director general of the Dubai Department of Tourism and Commerce Marketing, told local media recently.
Most of all, Dubai hopes it can save World Expo 2020, which was postponed to October 2021. The event was supposed to attract 25 million visitors and $23 billion in revenues and create 275.000 jobs. Those expectations will have to be revised downward.
“It seems unlikely that the delayed Expo 2020 will be able to attract the visitor numbers previously hoped for,” says Samuel Tilleray, sovereign credit analyst at Standard & Poor’s, “as the effects of the global pandemic are likely to linger in many prospective visitor nations. With this said, the vaccine program in the UAE is clearly positive for the event and should provide a platform for economic recovery.”
To turn its dream of a Covid-free zone world into reality, the UAE central government engaged early January in one the world’s most aggressive vaccination campaigns.
The authorities started by offering the first dose to all adults holding an Emirati ID, regardless of age and pre-existing health conditions. At the time, it seemed an ambitious initiative, since 88% of the population is composed of international migrants. But it was made possible because the UAE was the first country outside China to administer the Sinopharm vaccine massively, although scientific proof of its efficiency remains unpublished.
“The benefit to this approach has been to engender confidence within the business community and world markets that Dubai is committed to opening safely and at the earliest opportunity,” says Ahmed Abdelaal, group CEO, Mashreq Bank, the UAE’s largest private bank.
In March, after administering more than 6 million doses, the government decided to give priority to Emirati citizens and foreign residents over 40 years old.
Strong Financial Sector
Although it took a hard knock from the pandemic, the UAE banking sector remains strong and well capitalized.
“I have to give credit to both the UAE Government and the Central Bank of the UAE for introducing a range of measures to provide financial support to both individuals and businesses. The Central Bank’s Targeted Economic Support Scheme for instance provided capital, liquidity and funding assistance to banks. These relief measures have ensured that liquidity in the banking sector remained strong and enabled banks to continue to lend and support customers during this crucial time and help minimise credit issues arising” says Shayne Nelson group CEO of Emirates NBD Dubai’s biggest bank.
“Without exception, all UAE banks have demonstrated strong capital adequacy and liquidity,” says Abdelaal. “Many banks in the UAE have invested in their respective digital transformations; that helped them to continue serving their customers with minimal disruption. For Mashreq Bank, the transformation was very well advanced pre-Covid, which meant we were able to smoothly shift to pure digital operations,”
However, the crisis highlighted banks’ exposure to real estate as well as construction, hospitality and transportation.
“The downside is that many banks continue to face challenges from asset quality pressures,” says Abdelaal, “shrinking the coverage ratio for bad loans and increasing concentration of exposure to real estate sector.
Much of the fallout from last year’s slump has yet to be accounted for, says Mohamed Damak, senior director, financial services at S&P Global Ratings. “We expect banks’ asset quality to deteriorate and cost of risk to increase further as they start recognizing the impact of the 2020 shock and as the CBUAE lifts its forbearance measures in the second half of 2021,” he says.
While this process will unfold gradually, UAE banks will face longer-term profitability pressures, DAMAK (typo) warns.
“After dropping in 2020, we expect UAE banks’ interest margins to stabilize at lower levels, mirroring exceptionally low interest rates globally and locally,” he says. “A significant contribution of noninterest-bearing deposits to the funding profiles of UAE banks did not help. As cost of risk continues to increase, we think UAE banks’ profitability will keep declining, with limited prospect of returning to historical performance over the medium term.” Cost reduction will have to be on their agenda, including reducing their real estate footprint, relocating staff to lower-cost areas, and stepping up the pace of digitalization.
Large Lenders Look Abroad
Smaller banks might not make it out of the storm, presenting acquisition opportunities for their larger rivals, which are already looking to scale regionally and internationally.
First Abu Dhabi Bank (FAB) and Emirates NBD Bank have both started to establish their presence in Saudi Arabia, the region’s fastest growing economy. With only a few foreign players in the kingdom, the UAE’s two biggest banks are looking to target a new generation of young high net worth individuals with tailored wealth management products.
Egypt is also on the radar for UAE lenders who are looking to tap into Egyptian expatriates’ remittances. Only a limited number of banking licenses are available, which means the only way to enter Egypt is to buy out another institution. But with Lebanese banks facing difficulties at home, opportunities are opening up. First Abu Dhabi is expected to acquire Bank Audi in the coming months while Emirates NBD is in talks with rival Blom Bank.
UAE lenders are also increasingly looking to invest in frontier markets in Asia and elsewhere in Africa. Last year, Mashreq Bank closed $6 billion in deals in Asia, $1 billion in Egypt and $700 million in sub-Saharan Africa.
For some institutions, scaling abroad takes on an added dimension with the normalization of relations between the UAE and Israel. Emirates NBD, the Dubai International Financial Centre (DIFC) and Abu Dhabi Global Markets (ADGM) signed memorandums of understanding with Bank Hapoalim, the Israel’s largest bank. Bank Leumi, another Israeli lender, signed similar agreements with Emirates NBD and First Abu Dhabi.
"Emirates NBD has signed MOUs with a number of prominent Israeli banks to explore areas of mutual economic and commercial cooperation, including new business and trade opportunities for our clients across the Middle East, North Africa and Turkey region” says Nelson.
The Abraham Accords are expected to yield over $4 billion of new bilateral business opportunities, especially in new technologies, trade and logistics. With newly established air connexions between the two countries, several partnerships and collaborations are already signed or in the pipeline.
Some close observers caution against too-optimistic expectations.
“While the normalization of relations with Israel is certainly net-positive for the outlook, we don’t believe it’s a game changer for the UAE,” says Tilleray. “We have already seen signs that the visa-free travel afforded to Israeli citizens has been supportive of the tourism sector, but it remains to be seen whether some of the larger financial integration plans being touted will materialize and whether a relatively small country such as Israel will be able to make a sizeable growth impact on the UAE.
The end in January of the Qatar blockade, of which the UAE was one of the main drivers, is also expected to revitalize regional trade and financial flows. Together with the taming of the pandemic and the opening to Israel, the end of this particular regional crisis has encouraged many close observers to forecast a growth to return in the coming months.
“Growth in the UAE is expected to reach 2.5% by 2022,” the World Bank says in one of its latest assessments, “supported by government mitigation and recovery plans, higher oil prices and production capacity, improved business sentiment and a boost from Dubai Expo 2021.”