Introduction to UAE Economy and Key Sectors Outlook

Introduction to UAE Economy and Key Sectors Outlook November 2, 2020

Speakers

Trevor Cullinan

Director

Sovereign Ratings

Dr. Mohamed Damak

Senior Director

Financial Institutions

Ratings

Sapna Jagtiani

Director

Corporate Ratings

UAE Economy and Sovereign Outlook November 2, 2020

Trevor Cullinan

Director, Lead Analyst GCC, Sovereign & IPF Ratings

Map of the United Arab Emirates (unrated)

Source: S&P Global Ratings, https://www.dubaimanufacturing.com/united_arab_emirates_maps_gulf_cities_middle_east_territory_map.htm

UAE Federation – Constitutional Issues

The federation was established on 2 Dec. 1971 comprising all Emirates except Ras Al Khaimah, who joined in Feb. 1972.

Up until now the president of the UAE has also been the ruler of Abu Dhabi (currently Sheikh Khalifa bin Zayed Al

Nahyan). The vice president and prime minister of the UAE has been the Ruler of Dubai (currently Sheikh Mohammad bin

Rashid Al Maktoum). The respective crown princes of Abu Dhabi and Dubai play increasingly important roles.

The Supreme Council is the supreme authority in the federation. It consists of the seven rulers of all the emirates, who

each have a single vote in the deliberations of the Council.

The Federal Council of Ministers (the Cabinet) is the executive authority for the federation and is responsible for

implementing policy decisions of the Supreme Council.

The Federal National Council (the FNC) is a parliamentary body which comprises 40 members who are UAE nationals.

Although the FNC can monitor and debate government policy, it has no veto or amendment power and cannot initiate any

legislation by itself. Since 2006, elections have been almost every four years for 20 elected positions on the FNC. The

most recent FNC elections were held on 5 Oct. 2019.

The UAE Federal Government is responsible for foreign affairs; security and defence; nationality and immigration;

education; public health; the currency; postal, telephone and other communications services; air traffic control and the

licensing of aircraft and a number of other matters including labour relations and banking.

5

Source: S&P Global Ratings, Government of Dubai Base Prospectus, 29 July 2020

UAE Federation – Constitutional Issues

Each emirate has its own government, consisting of departments or authorities, so that each emirate retains significant

political and financial autonomy. Each emirate manages its own budget on an independent basis and no emirate has any

obligation to contribute to the budget of any other emirate. Each of Dubai and Abu Dhabi make contributions to the federal

budget in agreed amounts

The governments of the seven emirates are authorised to regulate those matters that are not the subject of legislation by

the UAE Federal Government. The Constitution permits individual emirates to elect to maintain their own competencies in

certain sectors. Based on this flexibility, Dubai has elected to assume responsibility for its own education, public health

and judicial systems.

The natural resources and wealth in each emirate are considered to be the public property of that emirate.

There are three primary sources of law in the UAE, namely (i) federal laws and decrees (applicable in all seven emirates),

(ii) local laws and decrees (i.e. laws and regulations enacted by the emirates individually), and (iii) the Sharia (Islamic law).

The secondary form of law is trade custom or practice. In accordance with the Constitution, three of the seven emirates

(Abu Dhabi, Dubai and Ras Al Khaimah) have elected to maintain their own court system, separate from that of the UAE,

and these courts have sole jurisdiction to hear cases brought in the respective emirates.

6

Source: S&P Global Ratings, Government of Dubai Base Prospectus, 29 July 2020

UAE Economic Structure:

The emirate of Abu Dhabi has by far the largest economy in the UAE.

However, of total UAE population, about 9.8 million in 2019, 34% of people live in Dubai compared with 26% in Abu Dhabi.

The UAE as a whole is relatively well diversified compared with regional peers.

However, Abu Dhabi’s economy is concentrated on the hydrocarbon sector.

59

28

13

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Emirate's share of 2019 nominal GDP

Abu Dhabi Dubai

Other emirates*

25

41

15

75

59

99 95

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

UAE Abu Dhabi Dubai Other emirates*

Sectoral share of 2019 nominal GDP

Hydrocarbon sector Non-hydrocarbon sector

Source: S&P Global Ratings, National statistical authorities *Indicative. Calculated by subtracting Abu Dhabi and Dubai data from the UAE total.

Largest non-hydrocarbon sectors contribution to 2019 nominal GDP

UAE Economic Structure:

% of GDP UAE Abu Dhabi Dubai Other

emirates*

Wholesale and

Retail Trade

12.5 5.2 25.4 18.0

Manufacturing 8.7 6.3 8.7 19.9

Financial and

Insurance

activities

8.7 7.7 11.3 7.8

Construction 8.4 9.4 6.4 8.6

Public

Administration

and Defense;

6.8 7.0 6.9 5.6

Transportation

and Storage

5.9 2.9 12.2 6.0

Real Estate

Activities

5.2 4.2 6.1 8.0

8

Outside of its concentration in the hydrocarbon

sector Abu Dhabi is relatively well diversified.

Dubai is a regional trade, finance and aviation

hub. As a result it is particularly exposed to the

lockdowns and restricted travel related to COVID-

19.

The real estate sector is something of a bell

weather for the Dubai economy and has been

declining sharply in recent years.

The smaller emirates have large manufacturing

sectors. Sharjah is to some extent the

manufacturing base for lots of Dubai businesses.

Ras Al Khaimah has large quarries, which

supports one of the largest ceramics businesses

in the world.

Source: S&P Global Ratings, National statistical authorities *Indicative, calculated by subtracting Abu Dhabi and Dubai data from the UAE total.

UAE Economic Structure And Growth:

Oil wealth and a smaller population than Dubai makes Abu Dhabi much wealthier in economic terms.

We expect sharp declines in GDP across the emirates in 2020, followed by a modest recovery.

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

UAE Abu Dhabi Dubai Ras Al Khaimah Sharjah

GDP per capita, $ thousands

-12

-10

-8

-6

-4

-2

0

2

4

6

2019 2020 2021 2022 2023

%

Annual change in real GDP

UAE Abu Dhabi Dubai Ras Al Khaimah Sharjah

Source: S&P Global Ratings

Copyright © 2020 by Standard & Poor’s Financial Services LLC. All rights reserved.

UAE – External and Monetary Policy Considerations

External: There is only limited external trade, balance of payments, and international investment position data available for

the individual emirates. For the rated sovereigns, we therefore base our assessment of the emirate's external position on

that of the UAE, as the "host country" as per our definition. However, even then there are data gaps which restrict our

visibility on external risks.

We view the UAE’s external position as a credit strength due to its significant liquid external assets, which include our

estimate of assets held by sovereign wealth fund Abu Dhabi Investment Authority.

Monetary policy: The UAE dirham has been pegged to the U.S. dollar at 3.6725 since 1997. We view the UAE's monetary

flexibility as limited by the fixed exchange rate, which requires the UAE to track movements in the U.S. federal funds rate,

even when they may not be appropriate for domestic economic conditions.

We expect the UAE dirham's exchange-rate peg to the U.S. dollar will remain in place over the next several years. In our

view, the UAE has more than sufficient reserves to defend the peg, while considerations of macroeconomic and social

stability would also likely outweigh the potential benefits of amending the exchange-rate regime.

10


Rated Emirates Fiscal Positions:

• Abu Dhabi has an extremely strong government balance sheet and has accumulated one of the largest net asset positions of all sovereigns we rate. We anticipate that, in the event of financial distress, the smaller emirates would receive extraordinary financial support from the UAE (with Abu Dhabi's backing). We estimate outstanding direct debt of the governments of Dubai, Ras Al Khaimah, and Sharjah at about 33% of Abu Dhabi's GDP in 2019.

• Ras Al Khaimah’s government balance sheet is largely balanced, while Sharjah’s government has taken on more debt in order to fund investment projects.

-300

-250

-200

-150

-100

-50

0

50

0 2 4 6 8 10 12 14 16N

et g

ener

al g

ove

rnm

ent

deb

t, %

GD

P

General government interest paid/General government revenues, %

Average government net debt and interest costs, 2020-2023

Abu Dhabi

Ras Al KhaimahSharjah


Net debt position

Net asset position

November 2, 2020

Dr. Mohamed Damak

Senior Director, Financial Institutions Lead Middle

East and Africa

UAE Banks: Lower Profitability And Weaker Asset Quality

A large and multi-compartmented banking system

13

Two offshore centers (Dubai International Financial

Center and Abu Dhabi Global Markets) with the

presence of several large international players and

dedicated regulators.

57 onshore banks (17 national banks, 11 wholesale

banks, 1 investment bank and 28 foreign banks).

Foreign banks are authorized to conduct business

locally and raise deposits. Wholesale banks are only

authorized to serve corporates.

Top 10 banks represent around 85% of the system

and government owned banks represent around 65%

of the system.

One regulator for the onshore banks: the United Arab

Emirates Central Bank.

Good quality of regulation and supervision; adequate

transparency for banks (Basel III, IFRS, etc.)

Consolidated FI assets / GDP = 2.1X

COVID-19 and low oil price exacerbated the pressure…

14

Weaker macroeconomic environment, continued correction on the real estate sector, and negative impact of COVID-19

and low oil price on hospitality and commerce will weigh on Emirati banks asset quality indicators.

The decline is exacerbated by a fraud case in one large corporate and the recent liquidation of a major construction

company.

Regulatory forbearance measures will delay the recognition of the problems to 2021.

NPLs are rising, coverage is broadly stable Credit losses will increase



% %

0

0.5

1

1.5

2

2.5

2014 2015 2016 2017 2018 2019 2020 2021 2022

Credit losses as a % of total loans

0

20

40

60

80

100

120

140

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

2014 2015 2016 2017 2018 2019 2020 2021 2022

NPLs / Total Loans

NPLs coverage by LLRs Credit losses as a % of total loans

But most of the banks will remain profitable in 2020-2021

15

Higher cost of risk and lower margin will

result in lower profitability for 2020-

2021.

Margin is expected to decline because

of lower for longer interest rate policy of

the FED (and the peg).

However, we expect most of the banks

to still show positive results in 2020.

Some banks might display losses due to

their exposure to high risk asset classes

or under provisioning.

Banks will continue to benefit from their

strong efficiency explained by fairly low

cost of labor, absence of taxes or social

levies, and relatively small branch

networks.

Lower profitability could prompt more

consolidations or more collaboration

with Fintech to curb costs.

The system will remain profitable

Source: S&P Global Ratings, Central Bank of UAE


%

34.0

34.5

35.0

35.5

36.0

36.5

37.0

37.5

38.0

38.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2014 2015 2016 2017 2018 2019 2020*

Return on Assets (LHS) Interest Margin (LHS) Cost / Income (RHS)

And they are well capitalized and mostly locally funded

16

External funding contribution is limited and the banking system is in net external asset position overall. This is by choice

and not so much because access to international capital is not possible.

Banks are highly capitalized on average. Over the past five years, most of capital raising exercise were done in hybrid

forms.

Funding is dominated by core sources with

limited external funding contributionCapital is strong quantitatively and qualitatively



% %

-8

-6

-4

-2

0

2

4

6

8

85

86

87

88

89

90

91

92

93

2014 2015 2016 2017 2018 2019 2020

Net external debt / Domestic loans (RHS) Loan / Deposits (LHS)

10

12

14

16

18

20

22

24

26

28

2014 2015 2016 2017 2018 2019 2020

Min Tier 1

Average Tier 1

Max Tier 1

Overall the risk profile is average

Starting point for the rating of a bank operating in the UAE is “bbb-” – Negative trend on ER and

IR for expected increase in credit losses and relaxation of some prudential regulations.

Weaknesses

Increasing credit losses due to weak economic

environment.

Still fragmented banking sector with high price

competition.

High sector and single-name concentrations.

Strengths

High-income levels and a strong fiscal and

external position.

Relatively more diversified economy than Gulf

Cooperation Council (GCC) peers.

Funding profile dominated by stable core

deposits.

November 2, 2020

Dr. Mohamed Damak

Senior Director, Financial Institutions Lead Middle

East and Africa

Islamic Finance: COVID-19 is an opportunity for the transformation of the industry

COVID-19, oil, and volatility: the perfect shock

19

We expect major economic slowdown in core countries followed by a mild recovery.

Several central banks in core Islamic countries reacted, opening liquidity taps and introducing more flexibility in capital adequacy

ratio calculation to keep lending for corporates…

A sharp economic contraction followed by a

mild recovery

Source: S&P Global Ratings, Eikon


Which will put pressure on the industry

growth for 2020-2021$ Bil.%

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

2014 2015 2016 2017 2018 2019 2020 2021

GCC Malaysia Turkey IndonesiaC

0

500

1000

1500

2000

2500

2014 2015 2016 2017 2018 2019e

Banking Assets Sukuk Takaful Funds

Affecting all the components of the IF industry

20

- We expect low-to-mid single digit

growth of the Islamic banking assets.

Corporates are reducing capital

expenditures and going for banks’

financing at subsidized rates. Banks

have cut their growth expectations and

reduced their risk appetite.

- Takaful will see a mid-single digit

growth while funds will be impacted by

the capital market volatility.

- We expect sukuk issuance to decline

in 2020. The fact is that the market is

already down by 14.4% and we expect

the drop to continue.

Source: S&P Global Ratings, International Monetary Fund, Eikon


Sukuk issuance dropped

$ Bil.

0

20

40

60

80

100

120

140

160

180

2014 2015 2016 2017 2018 2019 Sep-19 Sep-20

Total Issuance Reopening

The slowdown of sukuk issuance will continue

21

Better than expected market conditions resulted in a higher volume of issuance in foreign currency vs. last

year. Overall, we still expect the overall amount of issuance to be lower than 2019.

FX issuances were supported by sovereigns, multilaterals and banks primarily. Corporates are not issuing.

Most of the issuances are still in LC



$ Bil.

0

20

40

60

80

100

120

140

2017 2018 2019 Sep-19 Sep-20

LC FC

A handful of countries are issuing in FC

0

1

2

3

4

5

6

7

8

9

10

Bahrain Indonesia Kuwait Malaysia Qatar SaudiArabia

Turkey UAE

Sep-19 Sep-20

Why?

22

Core Islamic finance countries central banks opened liquidity taps locally and asked local banking

systems to lend to corporates – Lower financing needs for the corporates

Central banks will have no reasons to issue this year. They accounted for 17.5% of total issuance last

year and they are now providing liquidity instead of taking it – No or limited Issuances from CB.

Investors sentiment has changed and risk aversion has increased in the first four months of 2020. We

have then observed a reversal in sentiment explained also by the strong global liquidity.

Sukuk issuance is more complex than conventional bonds. We saw several governments from core

countries tapping the conventional markets instead. We think that most issuance in 2020 will either

occur under existing programs or in form of tap issuances.

A niche market with limited involvement of non core countries

23

The market is a niche rather an a mainstream market as shown by its significant concentration by

geography (GCC and Asia account for more than 90% of issuance volumes).

It is diversifying though. We saw few non-core issuers tapping the market (UK, Luxembourg, South Africa,

Goldman Sachs, General Electric Capital Corp, etc.).

The market remains highly concentrated



%

39%

38%

36%

43%

42%

41%

41%

35%

15%

14%

15%

11%

3%

7%

9%

11%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

2017

2018

2019

Sep-20

GCC countries Malaysia Other Asia Other Countries

Can Sukuk help Israeli issuers?

24

Market perception S&P opinion

Investors diversification True: Sukuk allow to attract investors that do no

invest in conventional bonds such as Islamic

banks, Takaful companies, Islamic asset

managers, etc. However, the total size of the

industry is relatively small ($2.4 trillion at YE

2019) and total investible assets in sukuk

estimated to around $500 billion.

Asset backing principle means that sukuk can be

a good instrument for infrastructure financing or

asset backed transactions

Incorrect: 99.9% of the market today is made of

structures that resemble to senior unsecured

instruments. There is a limited appetite for

project finance sukuk or asset backed sukuk.

Pricing can be cheaper than conventional bonds. Depends: on the issuer and the market appetite

but it is true that sometime sukuk issuance lead

to significant oversubscription which can

translate to a pricing advantage.

Sukuk are easy instruments to issue. Incorrect: Sukuk are usually more complex that

conventional instruments and necessitate

specific regulatory framework.

November 2, 2020

Sapna Jagtiani

Director, Lead Analyst, GCC Corporate RatingsAn Introduction to the UAE and the Larger GCC Corporate Market

UAE Companies Are Most Active In GCC Debt Capital Markets

76%

25%

66%

46%52%

63% 63%

18%

75%

11%

36%

38% 20%

32%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2014 2015 2016 2017 2018 2019 2020

Sh

are

in

Is

su

an

ce

Other KSA UAE

9.3

1.5

3.0

6.0 5.7

3.1

8.3

1.0

0.5

1.8

3.83.8

3.7

1.2

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2014 2015 2016 2017 2018 2019 2020 To Date

Iss

ua

nc

e (

$ b

ln)

Private Sector GA

GRE issuers represent the bulk of the market

Non Financial Corporates – Public Bond Issuance UAE and KSA based issuers represent the bulk of GCC

Corporate Bond Issuance

UAE Equity Capital Markets Aren’t As Exciting

26.02 7

5 5

3

4

2 2

1

4

3

0

1

2

3

4

5

6

7

8

-

5.00

10.00

15.00

20.00

25.00

30.00

Q42017 Q12018 Q22018 Q32018 Q42018 1Q2019 2Q2019 3Q2019 4Q2019 1Q2020

Co

un

t$ b

ln

Amount Raised - $ bln Number of IPOs

Saudi Aramco was the only large deal over the past 3 years

0 500 1,000 1,500 2,000 2,500 3,000

Saudi Arabia

Dubai (only DFM)

Abu Dhabi

Qatar

Kuwait

Oman

Bahrain

Volumes - $ mln

Outside KSA, very limited trading, and is dominated by retail

GCC IPO Market (2017 – To Date) 3 Months Average Trading Volumes in Equities

A Snapshot Of GCC / UAE Corporate Portfolio

7

4

1

3

5

2

4 41

3

0

2

4

6

8

10

12

14

Oil & Gas Real Estate Utilities Telecom IHCs Others

Co

un

t

GRE Non GRE

4

3

1 1 1

1

2

1

1

1

2

0

1

2

3

4

5

6

Oil & Gas Real Estate Aviation BusinessServices

Education Industrials Telecom Utilities

Co

un

t

GRE Non GRE

Sectoral Breakdown of the GCC Portfolio Sectoral Breakdown of the UAE Portfolio

GCC Country And Sector Vulnerability Matrix

0

4

8

12

16

20

2014 2015 2016 2017 2018 2019

Annual Foreign Visitors in Dubai (mln)

Tourism Is Key To Dubai

0 20 40 60 80 100 120

Atlanta,…

Beijing,…

Los…

Dubai, AE…

Tokyo, JP…

Chicago,…

London,…

Shanghai,…

Paris, FR…

Dallas Fort…

World's busiest airports by number of passengers 2019Dubai:1 st in international passengers and 3rd in total

Dubai Is An Important Trade Hub

31

0 5 10 15 20 25 30 35 40 45 50

Shanghai

Singapore

N-Zhoushan

Shenzhen

Guangzhou

Busan

Qingdao

Hong Kong

Tianjin

Dubai

The largest container ports worldwide in 2019, based on throughput (in million TEUs)

C

0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000

H. Kong, HKG (China)

Shanghai, PVG (China)

Incheon, ICN (S. Korea)

Dubai, DXB (UAE)

Doha, DOH (Qatar)

Taipei, TPE (Taiwan)

Tokyo, NRT (Japan)

Singapore, SIN

Leading airports for international air freight 2019 (Thd metric tons)

Dubai has the largest container port outside Asia Dubai has the largest air freight activity outside Asia

November 2, 2020

Dubai Real Estate Market OutlookSapna Jagtiani

Director, Lead Analyst, GCC Corporate Ratings

COVID-19 An Additional Drag On Dubai's Oversupplied Real Estate Market

Most impacted sector: Negative rating actions on 4 of the 5 companies we rate and only 2 of these ratings are on stable

outlook

Key Pressures

Residential: lower pre-sales, increased pressure for discounts or other incentives, and possibly slower cash collections

leading to higher working capital requirements

Retail: material revenue and EBITDA weakening due to rent-relief measures, lower footfall decline in tourists and

social-distancing measures and low consumer confidence affecting discretionary spending

Office: rental pressure and lower occupancies as tenants continue to rationalize fixed costs and staff

Hotels: Global travel restrictions, no corporate travel and limited recovery in tourist arrivals

33

Aviation And Tourism Have Been Hardest Hit

34

Dubai is particularly exposed as Dubai International Airport is one of the busiest in the world, and aviation and its subsectors are key employers

in the Emirate, which received over 16.7 million tourists last year.

60

70

80

90

100

300

350

400

450

500

550

600

2015 2016 2017 2018 2019

Ave

rag

e O

cc

up

an

cy L

eve

ls %

Ave

rag

e D

ail

y R

ate

s -

$

Average Daily Rates - $ Average Occupancy %

0

3

6

9

12

15

India KSA UK Oman China Russia USA

Sh

are

in

To

tal (%

)

Tourists by NationalityC

Dubai Hotels – Key Statistics Share in Tourism in Dubai by Nationality (2017-2019 Averages)


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Documents

Introduction to UAE Economy and Key Sectors Outlook