In a statement, the global monetary watchdog has urged UAE to take all the precautionary measures in order to lessen the effect of sovereign euro crisis.
The IMF was quoted by Reuters as saying, "While vulnerabilities have decreased since 2008, the results of this analysis nonetheless suggest that the (UAE) authorities need to remain vigilant to global shocks and continue to strengthen buffers."
Although, the IMF said that the banking system and financial intuitions of UAE are only moderately exposed to Europe with foreign liabilities are almost 19% of its total liabilities, while European nations occupy approximately 20% of UAE banking system assets.
"While the estimated level of financial spillovers to Dubai is once again increasing, it is still below 2008-09 levels. European countries, Greece in particular, have been key contributors," IMF added.
Until now, the UAE banking system did not show any signs of distress, and the chance of large losses simultaneously was very low, IMF stated.
"The results of this analysis show that risk is concentrated in a few banks; these banks will need stronger supervision and closer monitoring of their cross-border and their domestic interbank exposures."
IMF cautioned UAE that any deterioration in euro zone governments and banks being forced to fund themselves would pose a direct risk for the UAE.
"While the funding situation of local banks has stabilised, a foreign funding shock could generate some liquidity tightening in the banking sector," the report said.
IMF forecasted that the asset quality of UAE banks would depreciate this year and the number of bad loans would rise, although the banking sector would be able to handle a significant increase.
It also included in its report that seven out of 26 listed companies in the UAE”s real estate sector, with total liabilities of $12bn, have operating losses or do not have sufficient operating income to service their debt.
