UAE credit fears return as defaults rise
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UAE credit fears return as defaults rise

Oil rout weakens corporate debt sustainability; Rakbank and UAB suffer in SME downturn.

By Olivier Holmey

When the oil rout hit the UAE at the end of 2015, some foreign business owners defaulting on their debt chose a solution not seen since the 2008 crisis. “You heard of people driving to the airport, parking their cars and leaving,” Redmond Ramsdale, head analyst for GCC banks at Fitch, recalls. 

Now, market participants say, the initial panic has waned and ‘skip cases’, as they are called, are few and far between. But the country’s economy is still under pressure, and instances of firms big and small struggling to service their debt are rising. 

In February, Emirates NBD Dubai Economy Tracker fell below the neutral 50 level, signalling the first contraction in non-oil private sector activity in years. The tracker recovered slightly in March, but was, at 52.5, still close to historic lows. Bank exposure to troubled corporates is manageable and the problems are not systemic, say market watchers, but the region’s financial institutions are having to expend extra effort to deal with the relative weakening of the country’s corporates. 

Hit hard

Some sectors of the economy have been hit especially hard, including contracting and real estate, after cash-strapped regional governments cut back on tenders and thepost-Arab Spring rebound in Dubai property shuddered to a halt. A fall in Dubai real estate prices continued in the first quarter of this year, according to a report by real estate investor Jones Lang LaSalle, which cited a 10% year-on-year drop. 

Joseph Julian 160x 184

Joseph Julian,
Houlihan Lokey

“The most significant areas of stress have been around infrastructure and construction and contracting business, which have so much of their work tied indirectly or even directly to energy services, and where the governments themselves are a big part of the business,” says Joseph Julian, head of emerging-market restructuring at US investment bank Houlihan Lokey. 

“A lot of companies don’t quite know where to turn to raise capital. Even for relatively strong and healthy businesses, if they have a refinancing profile, a maturity profile, that would have been easy to refinance a year ago, or two years ago, it is much more of a challenge now.”

Drake & Scull, an engineering business founded in Abu Dhabi, is among those to have suffered from the slowdown. It has started a cost-cutting programme to boost working capital and reduce debt levels after posting a net loss last year of Dh940 million ($255 million). It blamed the loss on weaker oil prices, a slowdown in the construction sector and delays to clients’ projects in its core markets of the UAE, Oman and Kuwait.  Some observers also express concerns about Abu Dhabi National Energy Company (TAQA), which is active in oil and gas and water, and whose net-debt-to-ebitda ratio reached 7.4 times last year, up from five times a year earlier, with Dh74.2 billion outstanding. 

Yorick van Slingelandt, head of Middle East and North Africa at Moelis & Co in Dubai, says a number of firms will need to refinance and reduce their debts, but few will suffer outright crises. “The oil price is affecting certain sectors across the region, mainly construction and oil services,” he says. “There is quite a bit of activity in restructuring and refinancing there. But the concern is not systemic. Borrowing levels are much lower now than they were during the financial crisis.”

SME defaults

Meanwhile, banks have also been paying close attention to a rise of defaults and restructurings among SMEs, as the impact of lower oil prices trickles down to smaller firms. “Dubai has a relatively large SME market compared to other GCC countries,” says van Slingelandt. “The current reduced growth, increased regional uncertainty and the liquidity environment has created some strain on the SMEs – in turn impacting local bank appetite and redirecting their liquidity to safer exposures.”

The UAE Banks Federation said in March that there was an “increasing level of default being seen in the SME and corporate segments of UAE bank lending”. It said it would work to bring banks and borrowers together to minimise events of total default, amid “concerns about the sustainability of SME and corporate lending”.


The loan books of many banks in the UAE do not differentiate between lending to SMEs and lending to larger corporates, so it is difficult to assess their exposure to this weakened section of the economy.  Anita Yadav, head of fixed income research at Emirates NBD in Dubai, says SME lending probably makes up less than 10% of banks’ loan books. Ramsdale estimates it is 5% for the larger banks, although he says some may have double-digit exposures and therefore be more heavily affected by the economic slowdown. He counts National Bank of Ras Al Khaimah and United Arab Bank (UAB) among these.

Overall, loans are still growing, but at a slower rate than they were. Where lending in the UAE was growing at double-digit rates, it is now growing at high single digits, says Yadav. But observers still think the oil price would have to fall lower, for longer, for banks in the UAE to face real pain from loan defaults. “There are a lot of stresses in the system; you’re starting to see some of the cracks,” Julian says. “But it’s not like you’re going to have this massive wave of defaults everywhere, because there still is a lot of resources and capital to bring to bear.”

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