Credit market performance and economic security nexus in the UAE: Evidence from various estimation techniques

Abstract

This study aims to investigate the association between credit market performance and economic security in the United Arab Emirates (UAE) from 1990 to 2023 using various estimation techniques. The Gregory-Hansen cointegration test, ARDL bounds-testing approach, and DOLS, CCR, and FMOLS estimators were employed. Results from the cointegration tests show a long-term relationship between economic security and credit market performance, even with structural breaks. ARDL estimation indicates that domestic credit supply, nonperforming loans, lending interest rates, and institutional quality negatively affect both short-term and long-term economic security. These findings demonstrate that inefficiencies in the credit market, characterized by a rapid increase in credit supply and nonperforming loans, weak institutions, and a high cost of borrowing, pose a substantial challenge to the UAE's economic security and stability. Moreover, the ARDL findings suggest that oil price increases, public expenditure, foreign capital inflows, and real GDP contribute positively to economic security. These findings are confirmed by the robustness of FMOLS, CCR, and DOLS estimations. Based on these findings, policies, measures, and strategies to strengthen credit risk management in the financial sector, control unchecked credit growth, enhance the quality of economic institutions, and sustain the diversification of the economy away from oil and credit risks are recommended.