The non-financial corporate sector in the UAE is showing signs of fiscal improvement, albeit stress testing indicates continued vulnerabilities to global financial conditions, particularly in the real estate sector, the International Monetary Fund, or IMF, said.

The Washington-based fund said in its country report on the UAE, that the corporate-financial link is important for the Emirates.

Total assets of 53 listed non-financial corporates decreased slightly to $ 127 billion in the third quarter 2011 from $ 128 billion in the same period a year earlier in spite of the worldwide financial meltdown.

However, 10 of those corporates, mostly real estate companies, which have either operating losses or do not have ample operating income, “have sufficient cash cushions to service their debt,” the fund noted.

The IMF report said the total assets of the non-financial corporate sector make up about 37 per cent of the country’s gross domestic product, or GDP, and 34 per cent of bank assets. “Total debt has remained constant at around $ 34 billion while corporate leverage is within reasonable limits, with a debt–equity ratio of two. Short-term debt constitutes nine per cent of total debt,” the IMF report said.

The Fund noted that profits of the non-financial corporate sector have remained stagnant at around $ 1 billion whereas cash balances have decreased from $ 11.2 billion to $ 9.6 billion in 2011 third quarter.

“The net profits and cash position of the real estate sector are still much lower than the pre-crisis period, although there seems to be a slight turnaround in net profits in the first half of 2011, after a loss in 2010,” the fund said.

“Nonetheless, the corporate sector’s debt-servicing ability is still showing some signs of weakness, largely due to the real estate crisis,” it said in the report it prepared for consultations with the UAE and released this month.

“Out of 53 listed UAE companies, 10 have either operating losses or do not have sufficient operating income to service their debt, although they have sufficient cash cushions to service their debt. The total liabilities of these companies are $ 12.1 billion, their total debt is $ 3.3 billion, and they had cash balance of $ 0.7 billion. Of these 10, seven companies are real estate companies with total liabilities of $ 12.02 billion, total debt of $ 3.25 billion and $ 0.68 billion cash balance.

The IMF observed that the interest-paying capacity of the corporates was stressed by increasing short-term interest rates by 200 basis points, or bp, and 500bp from current levels, and by assuming a negative income shock of 25 per cent. “Higher interest rates and lower income can imply a much lower buffer against distress.”

According to the IMF, a foreign funding shock could generate some liquidity tightening in the UAE banking sector albeit the funding situation of local banks has stabilised.

In its report, the IMF had noted that stress tests show that the banking system could address moderate external liquidity shocks with its own resources, and that the stock of central bank foreign currency reserves would be sufficient to address even a strong shock scenario.