Abu Dhabi, Dubai CDS drops; reflects fiscal resilience

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Credit Default Swaps (CDS) for the government of Abu Dhabi have decreased from 44 basis points (bps) in December 2023 to 40 bps in March this year, indicating strong confidence in the emirate’s fiscal health and economic resilience.

This finding was published in the Central Bank of the UAE’s (CBUAE) Quarterly Economic Review for June 2024, which highlighted Abu Dhabi’s position as having one of the lowest CDS premiums in the Middle East and Africa.

The CBUAE attributes the low CDS levels to Abu Dhabi’s dynamic economy, robust fiscal position, and significant sovereign wealth funds.

In a related trend, Dubai’s CDS also fell from 71 bps (basis points) in  Q4 2023 to 65 bps in March, reflecting similar confidence in its economic stability.

UAE banking sector maintains strong capital levels

The review further indicates that the UAE banking sector has maintained strong capital levels, with overall capital adequacy ratios well above regulatory requirements.

The capital adequacy ratio reached 18.0 per cent, while the common equity tier 1 (CET-1) ratio improved to 15.0 per cent, both reflecting an increase of 0.2 percentage points year-over-year.

The UAE banking system continues to experience double-digit deposit growth, enhancing liquidity and funding buffers. Key liquidity ratios have shown improvement, with the liquidity coverage ratio at 157.7 per cent and the Net Stable Funding Ratio at 113.6 per cent.

Asset quality within the banking sector has also seen positive changes, as the stock of non-performing loans has decreased.

The net non-performing Loans (NPL) ratio moderated to 2.3 per cent, while the overall NPL ratio stood at 5.6 per cent in the first quarter of 2024. The total provision coverage ratio increased to 94.9 per cent, with specific provision coverage rising to 60.8 per cent.

Additionally, the combined lending portfolio of the UAE banking system experienced an 8 per cent year-over-year growth by the end of Q2 of 2024.

This growth was primarily driven by domestic credit expansion, particularly in loans to individuals and private sector companies.

Key segments, including mortgages, personal loans, and auto loans, have all shown significant growth, with domestic credit to individuals rising by 8 per cent year-over-year.