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Economic growth in the UAE will slow moderately in 2023 as OPEC agrees to oil production cuts and the non-oil sector decelerates as interest rates rise. This will lead to lower credit demand and growth at banks as monetary policy tightens, S&P Global said in a report.
“We expect real GDP growth to slow in 2023 as oil-related activity declines as OPEC agrees to production cuts. Positive performance from several non-oil sectors, including tourism, hospitality,
Oil and manufacturing will drive non-oil economic growth, albeit slower than last year,” analysts Puneet Tuli and Mohamed Damak said.
Analysts assume Brent crude oil prices will average $90 a barrel by 2023 and $80 a barrel by 2024.
A slowdown in the non-oil sector will reduce demand for credit. “Furthermore, higher interest rates and uncertain global economic conditions may lead companies to adopt a more cautious approach to capital spending.”
The real estate sector sees strong demand for residential real estate in 2022, reflected in rising prices and rents and record pre-sales by developers, which will slow down.
For UAE banks, the slowing economy and higher interest rate environment could lead to an increase in problem loans in sectors such as construction and trade, as well as some small and medium-sized enterprises.
Still, the cost of risk for banks will rise only slightly. “We expect UAE banks to cautiously increase coverage to historical levels.”
On the flip side, higher interest rates will help banks’ bottom lines. “While banks will face higher funding cost pressures, we believe higher policy rates will help UAE banks capture greater margins.”
They will also continue to benefit from stable and strong capital buffers, sound funding positions and expected government support.
(Writing by Brinda Darasha; Editing by Seban Scaria)
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