Central Bank Stimulus Package

What is the recently announced Targeted Economic Support Scheme?

The Central Bank of the UAE (CBUAE) has launched a AED100 billion ($27.2 billion) stimulus scheme to contain the economic repercussions of the coronavirus outbreak and a subsequent drop in economic activity in the UAE. This scheme called the “Targeted Economic Support Scheme” is made up of AED50 billion ($13.6 billion) from CBUAE funds through collateralized loans at zero cost to all banks operating in the UAE and AED50 billion ($13.6 billion) of funds freed from banks’ capital buffers.

Will this scheme offer any relief to private sector companies?

The stimulus scheme is part of a comprehensive action plan to help businesses overcome a potential liquidity and solvency crisis, at a time when the coronavirus outbreak and the crude oil price collapse are adversely affecting deposits and lending. The scheme will provide relief to all private sector companies and retail customers from the payments of principal and interest on outstanding loans. The immediate impact of this will be the rescheduling of loan payments which will prevent such borrowers from defaulting on their payment obligations.

CBUAE has also waived the fees which it charges for payment services provided to banks operating in the UAE through its payment and settlement systems for next six months. This measure will reduce the financial pressures on the banks, which are already most affected from the prevailing crisis.

In these trying times – what about the SME sector?

Further, the CBUAE has announced that it will adopt new regulations directing the banks to reduce the fees charged to vendors when their customers pay by debit or credit card and limit the fees charged to SME customers. CBUAE has also stipulated that the banks cannot require a minimum account balance of more than AED10,000 for its SME customers. New SME customers will be able to open bank accounts within two days, provided that the acceptable documentation is in place and AML/CTF regulations are complied with. Under normal circumstances, opening a bank account can take new SMEs up to three months, according to a 2018 white paper from the Dubai Chamber of Commerce and Industry. The move will seek to benefit the vendors in SME sector who are already struggling from the lack of business activity and the less tourists coming into UAE as a result of travel and visa restrictions in place.

What is the impact on investors in the real estate market?

Going forward, the above measures will hopefully reduce excessive market volatility and provide investors with increased flexibility to act in their best interest. The borrowers, especially those who have availed mortgage financing from the banks, can also breathe a sigh of relief as a result of rescheduling loan payments under this scheme. This should add a level of comfort and confidence into making an investment in Dubai’s struggling real estate market in future.

How does the UAE compare to other economies?

According to the latest IMF estimates, UAE’s GDP is $405 billion and the current stimulus of $27.2 billion works out to 6.67% of the economy. In comparison, Italy, a country hit hard by the coronavirus crisis, with an economy of $1,988 billion has only announced a $28 billion stimulus. Other major countries have also not announced any big program relative to their economy size. This means that the stimulus package announced by the UAE is bigger than most of the countries in relation to its economy size and reflects the determination of its policy makers to insulate the economy from the prevailing crisis.

In an interview with Bloomberg TV, Mubarak Rashed Al Mansoori, governor of CBUAE, also announced that CBUAE will assess the situation towards the end of a six month period and, if need be, will extend the scheme for a further period of time.

The scheme is followed by CBUAE’s decision to reduce interest rates by 75 basis points, in line with US Federal Reserve cuts to contain the economic repercussions of the coronavirus crisis.