According to a report by S&P Global, the UAE’s economic growth is anticipated to moderately slow down in 2023. This will be mainly due to OPEC-agreed oil production cuts and a slowdown in the non-oil sector as a result of increased interest rates.
The report stated that this will result in less loan demand and growth for banks, along with a tighter monetary policy.
The analysts Puneet Tuli and Mohamed Damak speaking to Zawya said, “As oil-linked activities will shrink on the back of OPEC-agreed cuts, we expect real GDP growth to slow in 2023. The positive performance of some non-oil sectors, including tourism, hospitality, and manufacturing will drive non-oil economic growth, albeit slower than last year.”
The analysts predict that the average price of Brent oil will be $90 per barrel in 2023 and $80 in 2024.
“The slowing of the non-oil sector will lower demand for credit. In addition, higher interest rates and uncertain global economic conditions might result in corporates adopting a more cautious approach to capital spending,” they said.
Prices and rents will rise moderately in the real estate market, as the property sector, which in 2022 experienced high demand for residential real estate as evidenced by price and rental increases as well as record presales for developers.
The slowdown in the economy and the environment of increased interest rates may cause UAE banks to have more problem loans in sectors like construction and trade, as well as for some small and midsize enterprises.
Despite that, the cost of risk for banks will rise slightly.
“We anticipate that UAE banks will prudently increase their coverage ratio toward historical levels,” they said.
On the other hand, the higher rates will help the banks’ bottom lines.
“While banks will face higher funding cost pressures, we believe higher policy rates will facilitate wider margins for UAE banks,” they added.