This report does not constitute a rating action.
Key Takeaways
- Diplomatic efforts to reach a ceasefire agreement between Russia and Ukraine are gaining momentum.
- In our view, the potential implications of a hypothetical ceasefire scenario for the UAE banking system are limited.
- Deposit outflows, a softening residential real estate sector, and potentially lower oil prices are the main channels of transmission, but we expect the overall impact on the UAE banking system to be contained.
S&P Global Ratings notes a high degree of uncertainty about the extent, outcome, and consequences of the Russia-Ukraine war. The exact scope and/or timing of the possible ceasefire or any other solution to the war are difficult to estimate at this point. That said, we outline below the key credit transmission channels that we will monitor as they evolve and our current assumptions under a hypothetical ceasefire scenario.
A Ceasefire Would Have Only A Limited Effect On The UAE Economy
We do not expect a ceasefire to result in an immediate reversal of Russian labor and financial inflows into the UAE. Although there are no official statistics on the number of Russian nationals or the financial flows that have come into the UAE since the outbreak of the war, anecdotal evidence suggests that they are not negligible. For example, Russians have been among the top nationalities buying or renting real estate in Dubai over the past three years, according to publicly available information.
Uncertain domestic political and macroeconomic dynamics in Russia will likely persist even in the scenario of a ceasefire, in our view. This will likely encourage individuals and businesses to maintain at least some presence and funds in the UAE. More generally, and if and when sanctions are relaxed, we still think individuals and businesses would likely to maintain some form of presence to benefit from the UAE's flexible and supportive economic environment, as well as its business-friendly regulations and low tax regime. Overall, under our current base case scenario, we expect the UAE's real GDP growth to accelerate and remain close to 4.4% on average over 2025-2027, following 3.4% growth in 2024. This assumes a gradual unwinding of OPEC+ oil production cuts and continued strong non-oil growth. We also expect oil prices to remain at around $70 per barrel over the next couple of years, which is helpful for the UAE's economy. While the impact of a potential relaxation of sanction on oil price is difficult to predict, a significant deviation from our base case scenario could have some implications on the economic environment in the UAE.
The Banking System Could Withstand The Implications Of A Ceasefire
A hypothetical ceasefire would have a limited effect on the UAE's banking system. In our view, two main channels of transmission are worth highlighting:
Deposit outflows. There is no publicly available data on the deposit inflows from Russian citizens and companies. However, in 2023-2024 we saw UAE banks' deposit bases increase much faster than the normalized growth rate, which we approximate using the average incremental deposit growth of 2018-2021 and 10% growth per year (chart 1). While some of these flows are certainly related to the outbreak of the Russia-Ukraine war, we believe that UAE banks have more than enough liquidity to deal with potential outflows. As of Nov. 30, 2024, UAE banks' liquid assets were equivalent to 3x total deposit inflows between 2022 and November 2024, which would give banks a strong cushion in the event of outflows. Even if most Russian nationals returned, they may nevertheless decide to maintain some form of presence in the UAE in order to maintain bank accounts and therefore capital in the UAE. We believe the incremental increase in deposits may also be linked to the broader appeal the UAE holds for foreign investors given its supportive business environment.
Chart 1
The effects on asset quality if residential real estate market were to soften. Direct exposure to construction and real estate accounted for 14.4% of banks' lending exposures in the UAE as of Nov. 30, 2024. Over the past three years, Russia migrant inflows, among other factors, have supported real estate demand in the UAE and the overall economic activity. We would not anticipate a significant disruption to the residential real estate sector, even if we were to see significant property divestments by Russians, given continuous strong demand and population growth. Dubai has witnessed an annual double-digit value increase since 2021, leading to significant capital gains for real estate owners. The market remains supportive as demand is still outpacing supply, a situation that we expect will continue in the next 12-18 months.
High yields and capital gains along with asset security could be another reason for Russians to stay invested in the UAE. In our base case, we expect UAE GDP growth to accelerate from 2025 and as such see limited risks to banks' asset quality indicators. We also note that most real estate transactions are not financed by mortgages, which reduces banks' exposure to real estate price risks. We also believe rated real estate developers will remain resilient, even if their operating environment weakened, thanks to solid revenue backlogs, reduced leverage, strong cash flow generation, and good liquidity buffers. Overall, we expect the UAE banking system will continue to display strong asset quality indicators (chart 2) and that the UAE central bank's recent change to the provisioning rules will further increase nonperforming loan coverage ratios--which were close to 100% in 2024--to levels comparable with some regional peers.
Chart 2
| Primary Credit Analyst: | Mohamed Damak, Dubai + 97143727153; mohamed.damak@spglobal.com |
| Secondary Contacts: | Tatjana Lescova, Dubai + 97143727151; tatjana.lescova@spglobal.com |
| Puneet Tuli, Dubai + 97143727157; puneet.tuli@spglobal.com | |
| Dhruv Roy, Dubai + 971(0)56 413 3480; dhruv.roy@spglobal.com |
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