As is the case with every single credit binge, the UAE’s — between 2010—15 — too resulted in an ensuing bloodbath, which, well, has been bloody.
Credit binges end due to some major shock to economies and always end badly. Ours was the collapse in oil prices that led to a contagion effect on every single economy closely linked with that of the UAE.
The multiplier effect has been vicious and aftershocks continue. Weak oil prices have brought up the fundamental deficiencies of these economies. As these weaknesses pertain to the elemental aspects of each of these countries, finding solutions — and implementing them effectively — will take a long time. Therefore the aftershocks will continue to be felt ... for a while.
Economists at banks track events and trends, proffering advice and strategies to treasury departments, to manage exposures of various sorts — foreign exchange, investments, interest rate, funding sources and so on. They also issue guidance on country risk, which helps banks supervise their exposure to countries.
The financial health of countries could affect banks in the UAE (and everywhere) through their direct exposures to them (loans to these countries, or to banks/companies in them, trade exposures vide letters of credit received, and so forth).
The advice of economists is at a macro level and needs to be taken seriously and applied to all levels of credit exposures at banks. I really do not believe this is being done as the analytical responsibility falls between stools at banks, leaving them sorely vulnerable.
This poses a vexing question — who exactly is responsible to analyse the likely impact of such events on a credit portfolio? Is it the credit risk management or the business side, or both combined? Let me explain with an example the importance of analysing, on a timely basis, regional macro political/economic trends and their impact on credit portfolios in the UAE.
Let us take the case of Nigeria and its impact on the UAE banking sector. This does not purport to be an exhaustive analysis, just an illustrative one to make the point. When oil prices collapsed and the Nigerian economy and the currency both began to slide, the implications for UAE banks and corporates were clear — the scarcity of foreign exchange and the depreciating naira would make it extremely difficult for foreign currency to be remitted out of Nigeria. Therefore Nigerian debt (bank and private) was likely to come under severe stress.
Companies here with dues from Nigeria were immediately exposed and began seeing payment delays. Stocks held in Nigeria fell in value; local bankruptcies soared, with thousands of businesses going under. This resulted in significant debts to UAE companies being wiped out, causing liquidity issues and delinquencies in debt payments.
These effects do not take into account the longer-term impact that the disappearance of Nigerian trading partners must have had on the UAE firms dealing with them. That is another kettle of fish altogether.
Discussions with bankers and borrowers here alike reveal that none of this was foreseen and, worse still, handled very well. Not only were problems not foreseen, but the reaction was one of panic and withdrawal of credit limits to borrowers when they needed them the most.
What is difficult to fathom is, with all the information at hand in real time, the banks missed forecasting events and were caught unawares. Anticipation makes for less panic and therefore for more studied reactions. Sadly, this did not happen.
This is a valuable lesson. If we look around us, at macro economic drivers in the region, one is filled with foreboding for the near term with serious, even dire, implications for UAE lenders.
What is to be deduced from all this? One thing for sure and that is, the aftermath of our credit binge is certainly not behind us, and the backlash is likely to continue for a longish period.
Consider the implications of what is going on with the major trading partners of the UAE — India, Saudi Arabia, dozens of African nations, Iran and so on. The implications are serious, as we will see in the next article that discusses just one major development in India, and its likely impact on firms in the UAE.
The writer is the head of Vianta Advisors.