GCC banks are facing the strong headwinds since the global financial crisis this year – as low oil prices hit liquidity and weigh on lending opportunities, according to a study.
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However, increased sovereign debt issuances and the opening up of Iran’s market is likely to provide some relief as the year progresses, BMI Research forecasts.
Its 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 on Gulf banks’ performance during 2017.
Aggregate credit is to expand by only 5.5 percent this year, the report said, which is significantly below the average 11.4 percent 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 Gulf 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 GCC states are likely to continue facing declines in fiscal revenues over this period as they seek to plus 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 percent and 8.5 percent since the start of 2015.
The report said: “Government deposits account for 10 -35 percent of Gulf banks’ non-equity financingm 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.”
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