during 2015, credit growth has remained robust, asset quality stable and capital buffers comfortable. However, sustained depressed oil prices and further tightening of monetary conditions could have an adverse impact on confidence, investment, and consumption, leading to an economic downturn and rising probabilities of default in the corporate and banking sectors. 15. Solvency of the UAE corporate sector can be assessed by analyzing probabilities of default (PDs) under adverse macroeconomic scenarios. In particular, probabilities of default (PDs) based on a forward intensity model, developed by the National University of Singapore (NUS), are a reduced form in which defaults have a Poisson distribution and the intensity of default events is a function of variables with predictive power. 7 The NUS intensity model is flexible enough to incorporate not only defaults but also exits of firms arising from mergers and acquisitions. In this model customized to the UAE, the PDs are a function of common independent and firm-specific risk factors such as stock market index, short-term interest rate, distance-to-default (the expected difference between the asset value and the default barrier, adjusted and normalized by asset volatility), profitability, size, market-to-book value, and idiosyncratic volatility. Both common and firm-specific risk factors are then driven by macroeconomic risk factors such as oil price changes, real non-oil GDP growth, consumer price inflation, and changes in the three-month EIBOR interbank rate. The NUS model is calibrated with monthly data for the period January 1990-December 2015 for a total of 74 UAE listed firms, of which 17 firms are banks while the remaining 57 ones are either private firms (47) or GREs (10). The annual macroeconomic data are interpolated accordingly. 16. The projections for the PDs start by defining scenarios for macroeconomic risk factors. The first scenario is a baseline consistent with the 2016-21 macroeconomic framework in which oil Brent prices continue to decline to $45.3 per barrel in 2016 but to gradually recover to $60.1 per barrel in 2021, real non-oil GDP growth slows down to 2.4 percent in 2016 and gradually improve to 4 percent in 2021, CPI inflation declines to 2.8 percent in 2017 and gradually increases to 3.6 percent in 2021, and the EIBOR interbank rate changes according to the Libor projections throughout the period. The adverse oil shock scenario consists of a sudden but permanent $10 reduction in oil prices through 2021, a 1.7 percent decline in non-oil GDP over the period 2016-21 associated with a gradual fiscal consolidation that would eliminate the additional fiscal deficit resulting from lower oil revenues, 8 a stable consumer price inflation and EIBOR interbank rate increases similar to the 7 The model was developed by staff of National University of Singapore (NUS) in collaboration with IMF staff. For further details, see Duan et al (2012), Duan and Fulop (2013) and Duan et al (2014).
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- Fall '19
- The Land, United Arab Emirates, ABU DHABI