At a time where countries around the world look to their governments to provide guidance on the way forward, UAE has taken preemptive measures to stimulate the economy and combat the continuing impact of Covid-19. On 14/03/2020, the Central Bank of the UAE (“Central Bank”) announced the ‘Targeted Economic Support Scheme’ (“Scheme”), an AED 100 Billion Stimulus Package designed to inject much needed financial mileage in key sectors of the economy. The Central Bank also declared foreign reserves of up to AED 405 Billion, giving a reassured outlook of the stability of the Arab Emirate Dirham, amidst a time where currencies are in free fall.
Structure of the Scheme
The financial composition of the Scheme is divided into a) an injection of AED 50 Billion worth of Central Bank funds to all banks operating in the UAE through collaterised loans at zero cost; and b) AED 50 Billion freed up from banks’ capital buffers.
To ensure that banks judicially utilize the available funds, the Central Bank has also issued certain guidelines. Participating banks are required to use these funds to provide temporary relief to private sector corporate and retail clients for a period of up to six (06) months, as these clients are reeling from the effect of temporary shortages in their cash flow due to the pandemic.
Banks in the UAE will be allowed to utilize up to sixty (60) percent of their capital conservation buffer, and those banks designated as ‘important’ by the Central Bank will be allowed hundred (100) percent utilization.
Measures introduced in the Real Estate Sector
The Central Bank has also announced an increase of Loan to Value ratios for mortgages for first time home buyers. A higher Loan to Value Ratio (LVR) essentially means that a first time home buyer will have to utilize less of his own assets to fund the purchase, thereby improve his affordability. While this increases the risk to the banks, this should be offset by the freeing up of their buffers.
Further, banks are now required to limit their exposure to the Real Estate Sector to twenty (20) percent, which may be increased to thirty (30) percent upon the banks increasing their capital buffer proportionally.
Ease of Doing Business for the SME Sector
The Central Bank has directed banks to complete SME bank account opening applications within two (02) days (subject to completeness of documents and satisfaction of AML guidelines). Further, the Central Bank has also announced that it will soon give directions to banks to reduce the minimum bank balance stipulation to AED 10,000.00 (UAE Dirhams Ten Thousand only) and limit the finance charges imposed on SME customers.
A Positive Step
The ability of countries to resurrect themselves after a global crisis depends on how proactive they are during the crisis itself. The introduction of the Scheme and the other associated measures taken by the Central Bank is a far sighted step that would immensely mitigate the impact of the Covid-19 pandemic on the world and domestic economy.
Further, the general response of Central Banks around the world in times of economic slowdown is to introduce simple quantitative easing measures, which are known to cause inflationary trends and currency de-stabilization. However, combining quantitative easing measures with other measures that ensure responsible lending and reducing the costs of servicing business loans is a balanced response by the Central Bank that would organically and sustainably aid the UAE economy in the coming months of worldwide economic hardship.