$100bn wiped off UAE stocks post-Lehman

The UAE’s preparedness to cope with the effects of a global financial crisis is much better than what it was in 2008, but the country remains exposed to vulnerabilities owing to the Euro Zone’s troubles, the International Monetary Fund (IMF) has said in a new report.

“The UAE’s financial system is highly integrated and still remains exposed to global financial vulnerabilities,” the IMF report noted.

The report highlights that the combined market capitalisation losses in the Abu Dhabi and Dubai stock exchanges between September 2008 and end-March 2012 exceeded $100 billion but noted that market volatility has settled down since the beginning of 2011.

Although financial vulnerabilities of the UAE have decreased since the 2008 global real estate collapse, given the UAE’s interconnectedness with international markets, it remains exposed to global financial conditions, the report said.

Additionally, the report maintains that although the global market’s perceived risk of a sovereign default remain below the 2008/09 peaks, credit default swap (CDS) market exposure to financial distress abroad has increased again in recent months and can be traced to developments in Europe.

However, the IMF paper highlights that the level of capitalisation and profitability of the UAE’s banking system “provides some comfort,” and that while the banks remain “moderately exposed to Europe, stress tests show that the aggregate banking system has adequate liquidity and capital buffers to withstand substantial shocks”.

Nevertheless, in view of the UAE’s financial system remaining highly integrated and exposed to global financial developments, the paper underscores the need for the central bank to continue to closely monitor the liquidity of individual banks and encourage them to proactively manage liquidity risks.

“There is also a need to mitigate increasing credit concentration, recognize NPLs [non-performing loans] fully, and continue to provision adequately. Enabling a more robust risk assessment culture, conducting regular stress testing of banks, and strengthening the framework for an early warning system would help further mitigate risks to the banking system and strengthen financial stability,” the paper maintains.

The IMF notes that concentration of risk in a few of the UAE’s banks indicates the need for close supervision of these banks and closer monitoring of their cross-border and domestic interbank exposures. “Enabling a more robust risk assessment culture, conducting regular stress-testing of banks, and strengthening the framework for an early warning system would help mitigate risks to the banking system and strengthen financial stability.”

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