World Economy

(P)GCC Banks to Suffer Credit Squeeze in 2017

(P)GCC Banks to Suffer Credit Squeeze in 2017(P)GCC Banks to Suffer Credit Squeeze in 2017

The (Persian) Gulf Cooperation Council member states banks are facing strong headwinds since the global financial crisis this year–as low oil prices hit liquidity and weigh on lending opportunities, according to a study.

The latest outlook says the combination of lower oil prices, reduction in capital expenditure and increased drawdowns in government deposits is squeezing liquidity and will impact the (Persian) Gulf Arab banks’ performance during 2017, BMI Research forecasts, Arabian Business reported.

Aggregate credit is to expand by only 5.5% this year, the report said, which is significantly below the average 11.4% recorded between 2011 and 2015. The slowdown is likely to be sustained over the coming five years, it warned.

BMI noted that the slowdown is due to (Persian) Gulf Arab sovereigns’ shift in position from being “net creditors to net debtors”.

Only “modest” recovery in oil prices is anticipated for the next two years, according to BMI–to average $57 per barrel in 2017 and $60 per barrel in 2018–meaning (P)GCC states are likely to continue facing declines in fiscal revenues over this period as they seek to plug deficits.

This has been particularly notable among government entities in the UAE and Saudi Arabia, BMI said, with government deposits in each country falling by 17% and 8.5% since the start of 2015.

The report said: “Government deposits account for 10-35% of (Persian) Gulf Arab banks’ non-equity financing, according to international rating agencies. These deposits, which tend to be cheaper for banks than tapping wholesale funding markets, have kept the banks highly liquid while boosting profitability.

“Their reduction is of particular concern in Oman and Bahrain, the two economies with the lowest fiscal and external buffers, where government deposits are already being tapped, resulting in tightening liquidity in the banking system.”

Meanwhile, the International Monetary Fund last week lowered its growth outlook for Saudi Arabia on back of lower oil production and capital spending.

In its World Economic Outlook report update, the IMF said gross domestic product will expand 0.4% in 2017. It compares with the fund’s October prediction of 2% growth in the October 2016 report.

In December 2016, the Saudi government said growth slowed to 1.4% in 2016, below the average of 4% in the past decade.

Saudi Arabia Ministry of Finance said the government posted a deficit of $79.02 billion for 2016, 9% lower than its initial estimate and expects the deficit to shrink to $52.80 billion, or 7.7% of GDP this year.

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