Why personal debt levels can't rise much further


Paying up Bank lending has tightened, while salaries are expected to remain steady in 2017, adding pressure on consumers.

The revelation last week that the average UAE resident is saddled with $11,590 worth of personal debt may not have come as a surprise to many. After all, this is a country with relatively high living costs and unique requirements, such as paying a quarter or even a year’s rent upfront, forcing many people to seek loans to tie them over.

The estimate, from National Bank of Abu Dhabi (NBAD), does remain much lower than in some developed countries, including the UK, where various reports last year put the average per capita debt between $21,490 and $36,661 – more than average earnings.

Yet, for a country that, like the rest of the world, is looking at sluggish economic growth for much of 2017, the UAE figure is bound to ring some alarm bells. The NBAD research paints a picture of steadily increasing personal debt levels over the last 24 months.

The figure for the third quarter of 2016 (the most recent available) shows a slight drop in borrowings compared to the three months earlier ($42,585), but it is still higher than in the same period of 2015, when per capita loans including credit cards, car loans and other forms of personal borrowing reached $11,228.

A debt-laden population is never a good thing, and what is worse is that salary expectations remain flat for the year ahead. More than three-quarters of GCC workers polled in a survey by recruitment firm Hays said they expected their salaries to remain the same or rise by a maximum of 5 percent in 2017, suggesting that consumer purchasing power will not improve any time soon.

However, I would argue that per capita debt levels in the UAE are unlikely to rise further as banks face ongoing profit squeezes that hamper their abilities to lend. In the past week, at least four UAE financial institutions reported double-digit profit drops in their fourth quarter 2016 results, and in some cases these came on the back of already declining profits in the previous year.

First Gulf Bank (FGB), shortly to merge with NBAD, reported an 11 percent fall in net profit for the three months to December 31, Abu Dhabi Commercial Bank posted a 16 percent profit drop in the samer period, and Mashreq Bank reported a 20 percent drop. Abu Dhabi-based investment firm Waha Capital’s fourth quarter net profit fell sharply (due to a provision for investments, the firm said), while NBAD bucked the trend, reporting a 28 percent profit jump.

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The pattern of rising personal debt presented by NBAD could be a case of the figures lagging behind the reality of slow lending growth in the UAE – customers may have taken out these loans some time ago. Banks have had tougher lending policies in place for a year or two now, as they seek to mitigate against low deposit growth and the risk of debtor default.

Customers have reported a tightening in credit standards in the last quarter, and research by Compareit4me.com last week supports this. It observed that while the overall number of loan seekers in the UAE had dropped slightly (by 1 percent) in the past year, the total number of loan applications had risen, suggesting that borrowers were having to scout around to find banks willing to lend to them.

Lower lending growth in recent months also has been a factor in banks’ reduced profitability – a vicious cycle that is unlikely to change any time soon.

For now, GCC banks will continue suffering profit squeezes as lower oil prices and ongoing drawdowns in government deposits reduce liquidity. And, while cash-strapped consumers may find it tough in the months ahead, we could see personal debt levels flatten out, too.

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