International Finance and Banking
The current world demonstrates the high degree of globalization of financial markets. Due to the impacts of the fiscal recession that pursue to unroll, the world encounters solid and severe challenges regarding the operation of both the capital markets and global economy. As the combined demand is failing, there is a potential hazard of a serious global crisis, which will affect numerous spheres, asset categories, and states. Given this situation, it is important to understand the level of financial stability in the UAE.
The state of the UAE economy sustained on solid basis in 2014 regardless of the declines in oil costs due to the fact that the country had felicitously managed to shift the focus of its economy from oil to other spheres, including tourism, commerce, and transportation (Al Mansouri, 2015, p. 8). The circumstances of 2015 can be viewed as softer. The major incentives of worldwide economic evolvement moved from the developing market economies to the developed ones during 2014 as the increment impulse in principal developing markets appeared as decrement (Ibrahim, 2015, p. 93). The current situation demonstrates that regardless of enhanced circumstances, the level of soft inflation is persistent as the main central banks continue to sustain a reconciling monetary policy position (Al Mansouri, 2015). Therefore, despite the fact that economic evolvement was attenuated in 2014, the UAE economic setting can be viewed as floating (Sanwari & Zakaria, 2014, p. 96). Nevertheless, the current situation manifests that the state’s non-hydrocarbon economic operations are increasing at a serious pace and comparatively harmless inflation ratios (Ibrahim, 2015, p. 93). In addition, the incentives of the UAE economic development have moved toward domestic agents that actually assisted in shielding the UAE economy from the decrease of oil values. A systemic hazard sustains softened in regard to the UAE. On the other hand, credit increase abides at supportive levels concerning the UAE economy. The comparison with GDP demonstrates that the credit-to-GDP level is approximate to the long-range tendencies as well (Ibrahim, 2015, p. 94). The analysis of fiscal stability indicators in the UAE show that the banking sphere stays in a good shape. The facts demonstrate that the banking system is greatly capitalized with a medium fund conformity ratio of 18.2 percent (Al Mansouri, 2015, p. 10). The figures display that the country’s Return on Assets stays at the level of 1.7 percent, while the Return on Equity ratio sustains at the level of 13.6 percent (Al Mansouri, 2015, p. 10). Moreover, the UAE non-performing debts have lowered essentially to 7 percent and sustained utterly implemented (Sanwari & Zakaria, 2014, p. 95). On the other hand, the UAE banking system liquidity holds at satisfying levels as the level of liquid assets comparing to total assets remains at 15.7 percent (Ibrahim, 2015, p. 95). Therefore, the fiscal account of the UAE banks sustains discrete and competently multiform, while the level of the loan to deposit ratios is lower than 100 percent (Al Mansouri, 2015, p. 10). The country demonstrates restricted dependence on capital and foreign market funding. The facts display that Islamic banks own 404 billion AED (United Arab Emirates dirham) aggregate assets, including 17.6 percent of banking sphere capital and 19.3 percent of banking system loaning (Ibrahim, 2015, p. 95). Moreover, it is known that the Central Bank has developed a specific Financial Stability Trend Index, which imposes quantitative approaches and consolidates nine exponents in order to obtain the fiscal stability in the country (Sanwari & Zakaria, 2014, p. 94). In addition, the facts demonstrate that the UAE banking sphere becomes more amalgamated into the worldwide fiscal markets (Sanwari & Zakaria, 2014, p. 95). Therefore, foreign divulgation of the UAE banks express restricted fiscal security concerns because they are proficiently interspersed and appear as principal to the Gulf Cooperation Council. On the other hand, the UAE shadow banking stands for less than 3 percent of the overall fiscal system capital, the affiliates of which are targets of the Central Bank regulations (Ibrahim, 2015, p. 97). The country also encountered the increase of the property costs in 2014; however, the current value has been stabilized (Sanwari & Zakaria, 2014, p. 96). The facts demonstrate that the Central Bank has initiated a procedure of upgrading its regulative framework in accordance with Basel III norms and best multinational practices. The major spheres of reforming encompass funds, liquidity, hazard management, enterprise management, and non-bank fiscal establishments (Al Mansouri, 2015). The country has also implemented a specific macro-economic stress testing in order to evaluate the capability of the UAE banks to endure solid but feasible aggravations in the macro-economic setting. On the other hand, the facts demonstrate that regardless of the increased instability and the reduction in capacities, the UAE stock market elevated by 7 percent in 2015 (Al Mansouri, 2015, p. 11). The lowering of the oil values has negatively affected the market state, thus a number of obtained solid and persistent profits in 2014 (Sanwari & Zakaria, 2014, p. 96). These results have stimulated foreign and institutional depositors to remain as net bidders of the UAE stocks in 2015 (Ibrahim, 2015, p. 98).
If the UAE government decides to move away from pegging the Dirham to the Dollar, it may have serious impacts (both positive and negative) on the UAE’s trade deficit, inflation rates, economic growth, and financial stability. The main reason against this shift regards the fact that it can import inflation from other economies, while the UAE monetary strategy requisitions disperse from the U.S. Federal Reserve strategies and policies (Bouyamoum, 2014). The history shows that in 2007, when the analogous shift had been discussed, the U.S. cut interest rates at the time when the UAE was prospering and undergoing double-digit inflation (Maceda, 2015). Nevertheless, this solid proportion of inflation has been explained through constitutional problems, including housing deficit; and experts believe that the monetary policy could not fix the issue (Maceda, 2015). Therefore, the shifting from pegging the Dirham to the Dollar will definitely subject the UAE to oil value oscillation, and dubious economic circumstances will probably undermine social and political order of the country (Bouyamoum, 2014). Considering the arguments in favor of adapting the peg or conflating the dirham in general, merits become progressively important, especially after the downfall of oil and the increase of the U.S. dollar have altered the cost-advantage calculation (Sanwari & Zakaria, 2014, p. 87). The facts demonstrate that the stability of dollar pegs in the UAE appear under a progressive inquiry, which suggests that shifting toward the floating exchange rate regimes might be a perfect solution (Ibrahim, 2015). The downfall of the oil value cuts the cost of exports, which makes a present account and trade deficit more probable. The facts show that the UAE might encounter a trade deficit accounting for approximately 3 percent in 2015/2016 (Bouyamoum, 2014). Decreased oil costs display that the state might confront a financial budget deficit of 3.9 percent in 2016 (Maceda, 2015). The statistics demonstrate that when the UAE markets oil, the state obtains Dh367 for each $100 at the current rate of Dh3.67 to $1 (Hunter, 2015). Nevertheless, if the country markets the analogous quantity of oil with a weaker dirham, for instance, Dh4 to $1, it receives Dh400 for the analogous amount of exportations (Hunter, 2015). Therefore, the statistics display that a weaker currency can uplift oil, exportation capitals, and lead to solid economic growth (Ibrahim, 2015). Moreover, since the financial and flow expenses are valued in dirhams, devaluation might assist in plugging the lacunas in the financial deficiency and the central bank’s covings. The present account deficiencies pose an existential hazard to the economic plan of the UAE. It is obvious that the state’s position as a net creditor is essential to its economic strategy (Ibrahim, 2015). Therefore, the facts demonstrate that having no greenback peg, the UAE Dirham may undergo serious devaluation, similar to the situation observed in China and Kazakhstan (Maceda, 2015). On the other hand, this strategy can ruin the financial stability (Ibrahim, 2015). The financial situation will become weak if the dollar is appreciated in value. The current facts show that the Dh3.672 (to $1) will sustain practically unconverted with the value of oscillation being exposed by the UAE Central Bank, which provides a greater purchasing power for those converting dirhams to dollars (Hunter, 2015). Nevertheless, the assumed costs of the UAE Central Bank presume that if $1 is marginally equal to Dh3.972, then the value will be defraying Dh0.3 for each dollar in the UAE (Hunter, 2015). Therefore, the UAE Central Bank will have to obtain extra dollars in order to sustain the reality of 1 dollar being equal to Dh3.672 (Hunter, 2015). The bank will appear in a situation when it might not be able to defend the above-mentioned equity anymore. The facts display that the fluctuation of dollar is milder, which is the main reason why numerous states peg their currencies to it (Ibrahim, 2015). Nevertheless, oil prices demonstrate that the economic growth can seriously benefit from the shift (Maceda, 2015).
The current paper has analyzed the financial stability in the UAE, demonstrating that central banks continue to sustain a reconciling monetary policy position, while the incentives of the UAE economic development have moved towards domestic agents, which actually assists in shielding the UAE economy from the decrease of oil values. The paper also analyzed possible impacts of probable decisions of the UAE government to move away from pegging the Dirham to the Dollar. Therefore, this action will negatively impact on inflation and states trading deficit. On the other hand, it can seriously improve the economic growth and enhance country’s financial stability as devaluation might assist in plugging financial deficiency lacunas, while oil prices can solidly benefit from currency shifts.