UAE Central Bank sets up Dh100 billion stimulus to offset coronavirus impact

Dubai: The UAE Central Bank is pumping in Dh100 billion as stimulus package to offset the slowdown in the economy set off by the coronavirus outbreak and subsequent drop in business activity.

This will be split into Dh50 billion from the Central Bank’s own funds, which will be offered to local banks at zero interest rates. These will be routed as collateralised loans to the borrowing banks, the Central Bank said in a statement.

The other Dh50 billion will be tapped through the capital buffers operated by banks operating in the country.

Banks who use the Central Bank funds can use it to give “temporary relief” to private sector businesses and individual clients for a period of up to 6 months.

The initiative - called the Targeted Economic Support Scheme - represents the single largest stimulus package among Gulf states to date. It comes just days after the Central Bank issued a directive to local banks to go easy on loan payments by customers, advising a “re-scheduling of loans contracts, granting temporary deferrals on monthly loan payments, and reducing fees and commissions for affected customers”.

In its latest statement, issued late Saturday, the Central Bank said it had foreign currency reserves of Dh405 billion plus as of March 10, to support any market intervention/stimulus offering. It added that it remains committed to maintaining the dirham peg to the US dollar.

Financial muscle

As for the new scheme, it said: “The UAE banking system is adequately capitalised and banks maintain significant voluntary capital buffers in addition to the minimum prudential requirements. The drawdown of those voluntary buffers is not considered for the purposes of calculating the overall size of the targeted economic support scheme.”

What is a capital buffer?

It is a financial cushion or mandatory funds that financial institutions are required to hold. This is in addition to other minimum capital requirements they hold. Capital buffers were raised for banks after the 2008 global financial crisis.

Constant monitoring

The Central Bank, which last week followed the Federal Reserve in cutting interest rates by 50 basis points, said the banking sector needs to be on guard for any “potential” worsening of the situation.

It advises that all banks and finance companies review and update their business continuity plans.

Individual clients too

It’s interesting that the Central Bank directive on lending makes a specific reference to banks’ retail clients. “The Central Bank is taking pre-emptive action to stave off defaults on loans by businesses… and individuals,” said an official with a mortgage lender. “By easing the pain as much as possible, the Central Bank wants to reduce the risk of a domino effect of businesses failing and taking down individual borrowers too.”

The Central Bank in its Saturday announcement acknowledges as much - “Many retail and corporate customers have become exposed to the risk of temporary shortfall of their cash flows due the outbreak of Covid-19 pandemic, and the scheme is addressing the current situation by providing both a relief to customers and a zero cost funding to banks.”

Mortgage payments too would come under the ambit of the relief mechanism announced. According to Imran Farooq, CEO of Samana Group, “The unprecedented support of a Dh100 billion stimulus has immediately boosted morale and trust of companies and individuals in the UAE. We confidently tell our stakeholders outside the country that the UAE will remain a safe haven.”

Easing of mortgage and real estate loans

To boost real estate related lending, the Central Bank has advised raising the loan-to-value for first-time home buyers by a further 5 percentage points.

Currently, the maximum loan-to—value cap is set at 80 per cent for an expat, on purchases of properties under Dh5 million. And for homes valued at Dh5 million and over. the loan-to-value ceiling for expats is 65 per cent. (The loan-to-value ceilings are much more stringent in the case of offplan property purchases.) The additional 5 per cent can come in handy for first-time owners but don’t have the cash available to put all of the down payment requirements.

According to the Central Bank, “This will contribute to the affordability of housing without unduly increasing inherent risks.”

In another major break for the local real estate sector, the regulatory bank also revised the existing limit on the maximum exposure banks can have to the real estate sector. “When the exposure reaches 20 per cent of the banks’ loan portfolio, banks will be allowed to increase it to 30 per cent, but will be required to hold more capital.”