Abu Dhabi’s economy remained stable in 2018 and looks set for growth this year
Despite declining oil prices and a slowing world economy, Abu Dhabi’s economy has retained its strength and looks set for a year of robust growth in 2019. S&P Global Ratings assigned Abu Dhabi a stable outlook in December, based on the expectation that the UAE capital’s economic growth will “steadily recover” and the UAE’s fiscal position will remain strong through 2019-2020, it said in a report. S&P affirmed its ‘AA/A-1+’ sovereign credit ratings on Abu Dhabi based on its strong fiscal and external positions. “The exceptional strength of the government’s net asset position provides a buffer to counteract the effect of oil price swings on economic growth, government revenues, the external account, and increasing geopolitical uncertainty,” the organization said in a statement.
Experts from sectors including banking and finance, film and TV production, real estate as well as consultancy firms offer their perspectives on the year ahead for Abu Dhabi.
Rola Abu Manneh, CEO, UAE, Standard Chartered,
Emilio Pera, Partner and Head of Audit and Financial Services, KPMG in the Lower Gulf
Sameer Lakhani, Managing Director, Global Capital Partners
Dr. Ryan Lemand, Senior Executive Officer and Board Director at ADS Investment Solutions, Global Head of Wealth Management at ADSS
Greg Rung, Partner, Financial Services, Oliver Wyman
Amr El Saadani, Managing Director, Financial Services, Middle East, Accenture
How has Abu Dhabi’s economy performed in 2018 in your opinion and what are your expectations for 2019?
Lemand: In line with most of the oil exporting countries Abu Dhabi has seen moderate economic activity in 2018, which is in-line with the lower than expected oil prices in 2017 and early 2018. The level of economic activity, as with previous years, has been made possible by the diversification of the economy away from oil. This has been driven by a number of important Government initiatives.
Emilio Pera, KPMG
The continued consolidation in the banking sector has been noteworthy and will help banking and financial institutions run more efficiently. This has been supported by the performance of the Abu Dhabi Exchange which has had a good year, compared to other stock markets in the region, which has also had a positive impact on the financial sector as a whole.
Lakhani: For Abu Dhabi, the fact that the pace of development is gradual, increasingly diverse and enticing enough to encompass the mid income spectrum of the market implies that the upside potential will become a factor in the decision making for investors. It is important to recognize in this context that institutional money flows are expected to increase as well (albeit gradually) into the real estate sector, especially now that the Central Bank has removed the 20% exposure cap on the real estate sector; we opine that this will imply increased money flows towards the asset class. Again this is likely to be gradual, given the headwinds that the sector has faced over the last three years. In the final analysis, given the structural improvements in the economy, as well as the reforms that have been announced, there is reason to increase exposure, as the economy gathers steam in 2019.
Which areas of the banking industry have the most room for growth and development in Abu Dhabi?
Rola Abu Manneh: We continue to see interest for a range of financing products in the market. In particular, Debt Capital Markets, is an area where we see good business momentum in the region. As a matter of fact, Standard Chartered has been the top manager for bonds and sukuk in the Gulf region this year, according to Bloomberg data.
Rola Abu Manneh, Standard Chartered, UAE
The drop in oil price, resulting in low supply of capital, has given us the opportunity to tap our international network and attract investors from outside the emirates. Another area of growth is wealth management where there is a demand for tailored investment and insurance products. Our products are structured with the client in mind which is one of the reasons why despite the market softening with oil prices dropping, our volumes have picked up last year.
The stimulus plan in Abu Dhabi as well as the numerous infrastructure projects that are currently taking place are a big boost in driving economic activity in the UAE as well. The EXPO 2020 will see the banking sector play a significant role as it will likely have positive implications on three key parts of the economy: housing, infrastructure and hospitality.
Pera: There is opportunity to further grow in most segments within the bank, however, in order to remain competitive in the retail banking sector and attract new customers, it appears like banks will have to consider investing in new digital solutions to remain relevant. In addition, by enhancing internal processes, cross-selling may also be improved. For corporate customers, large exposure limits and a slowdown in some segments of the economy will require banks to look for opportunities outside the traditional geographic focus in order to maintain strong growth momentum.
What are the main challenges facing the banking sector in Abu Dhabi? How can these challenges be overcome?
Rung: The main challenges to be overcome internally continue to be a customer centric approach and operational efficiency. Most banks have a clear opportunity to maximize the revenue from their client base by developing a 360 degree view of those and marketing them the products they need at the right time and with the right channel. Getting new clients and new products is very competitive and expensive. In addition, significant operational automation opportunities exist that help cost efficiency as well as provide better process control.
Greg Rung, Partner, Financial Services, Oliver Wyman.
Alsadani: Well, the GDP growth is expected to rebound in 2018, however, business sentiment remains cautious. The lending and the deposit volume from the private sector have increased marginally over the last three years, and trade volumes have also remained relatively stable since 2014. There is no peak.
Bank credit has been steadily growing, with Islamic finance growing at the rate of four times faster than the conventional finance. But digital banking will require lots more investment from all the banks and that’s part of the reason why we now see these mergers happening.
How is Abu Dhabi developing as a financial center?
Lemand: The sustained development of the Abu Dhabi Global Market (ADGM), which is becoming a strong emerging market financial centre, is supporting international and local financial and banking institutions. This emergence has been strengthened by the passporting agreement between the Dubai International Financial Centre’s (DIFC) the Dubai Financial Services Authority (DFSA), the onshore Securities and Commodities Authority (SCA) and ADGM’s Financial Services Authority (FSRA). This retrospective agreement allows authorised companies to practice activities across the three UAE jurisdictions, which is one of the most important regulatory milestones since 2011.
The ADGM is now recognised as being better regulated than other comparable offshore financial centers. Having a legal system based on England law and having a fast to market turnaround is attracting many renowned businesses to the ADGM. So, it is no surprise that several tier 1 international financial and banking institutions have established a presence in the ADGM. This is in addition to Abu Dhabi Investment Authority (ADIA), Abu Dhabi’s sovereign wealth fund, and other Emirati banks, which are taking advantage of the benefits the ADGM provides.
We have already seen significant consolidation in Abu Dhabi’s banking sector with the creation of FAB in 2017.
Do you expect to see more consolidation in 2019? What will the effects be?
Alsadani: This consolidation will drive local players to become more efficient. They cannot sustain just single banks and they need this basis to grow significantly, and mergers allow this. Moreover the emergence of larger and more sophisticated players will increase the standing of Abu Dhabi as an international financial hub. The UAE and Saudi both want to become financial hubs. We’re seeing a merger start in Saudi Arabia: They’ve realized only the stronger will survive. The smaller players require more investments and they cannot sustain it.
Rung: The consolidation trend has continued with proposed merger between ADCB, UNB and Ali Hilal. There are ~50 banks for a population of 9 million people. We expect this trend to continue, likely involving smaller banks which are running sub-scale operations. Mergers are a welcome trend that bring higher efficiencies, reduced funding costs and new business opportunities due to larger balance sheet and capabilities.
Pera: In addition to the merger of NBAD and FGB to form FAB in 2017, in Abu Dhabi we are also currently seeing the three-way merger of ADCB, UNB and Al Hilal. With additional regulations and the need to invest in technology to remain relevant in an increasingly competitive environment, there is an expectation to see further consolidation, or banks re-focusing on their niche segments of the market.
What are the key strengths of Abu Dhabi’s major banks, and of Abu Dhabi as a banking hub?
Pera: Increased consolidation appears to be creating critical mass. Individual players in the market and those with a stronger capital base would be better positioned to participate in transactions of scale. Consolidation of resources also allows for attraction and retention of more competent employees.
Rung: The local banks are well-capitalized, with good liquidity profiles and good cost-income ratios which shows good efficiency. Overall the UAE and Abu Dhabi banking sector has a stable outlook, recovering gradually over the past year. We expect gradual credit recovery in corporate sector due to an improving economic outlook. In retail we expect a major push on digitalization and automation. Within the SME sector, we expect banks to wait and continue being cautious in the near term. In corporate banking, we expect an increasing focus and opportunities in transaction banking.
Alsadani: ADCB, FAB and Al Hilal, they have been driving innovation agendas for their countries. We are seeing now the Neo banks, with the objective of increasing financial inclusion in the area. And Hilal executed the first Sukuk transaction using blockchain technology. I believe that we will see more FinTech solutions adopted by the large players.
Retail banking and that of the small medium enterprises will be the first adopters, I think in the first wave of innovation. Typically, mobile first will start, so mobile banks and Neo banks will become the new paradigm in the consumer banking space and wealth management.
Do you expect the AED 50 billion stimulus announced earlier this year to have much of an impact? What will be the role of banks in this stimulus, and will banks benefit much?
Rola Abu Manneh: Abu Dhabi’s recent announcement of AED 20 billion (USD 5.45 billion) spending next year reiterates the Emirate’s confidence that it will achieve the economic goals set out in its Vision 2030. This is part of the original announcement in June of Abu Dhabi’s three-year AED 50 billion economic reform and stimulus programme.
For the banking sector, the plan is expected to include a credit guarantee scheme to support businesses that face challenges in accessing bank financing. Generally speaking, liquidity conditions in the banking system have improved as deposit growth has outpaced loan growth. However, there are initial signs of a recovery in credit to the private sector. The Central Bank of the UAE’s latest Credit Sentiment Survey suggests that demand for loans from corporates and small businesses increased in Q3 2018.
We see these measures by Abu Dhabi government as confident and proactive in the need to make cyclical and structural changes to support the domestic economy. We think that the use of counter-cyclical fiscal policy is likely seen as regional competition for human and financial capital as the region picks up. We believe that the UAE is well positioned to benefit economically from the planned changes, given the already-diversified nature of the economy.
Lemand: This was a targeted stimulus which will have great benefits for specific sectors and projects, helping to drive these forward, and was not intended to have a direct impact on the overall economy. However, the improved legal and regulatory framework, with the introduction of the bankruptcy laws, will allow banks to play a bigger role in financing SMEs, which is the main driver of sustainable economic growth in any emerging economy.
Alsadani: It’s a tough question but I would say it will become the cornerstone of the development of the banking sector because we expect to see more SME activity around that investment, and as a result increased banking lending to the sector. The Abu Dhabi stimulus plan follows a similar approach that was being implemented in Dubai. So the combination of these two measures is expected to increase the benefits to the overall UAE private sector.
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