Dubai: The banking system in the Gulf does not face any systemic risk although the banking sector as a whole suffered massive losses due to the asset price crash that resulted from the global credit crunch, said Masoud Ahmad, Director of the Middle East and Central Asia Department, International Monetary Fund in Dubai on Sunday.

Unveiling the IMF Regional Outlook, Ahmad said GCC banks' profitability fell substantially in 2008 and the first half of 2009.

"While the provisions for the non-performing loans [NPLs] have increased during the last two quarters, we expect them to peak in the last quarter and the asset growth to remain sluggish though this year," he said.

Participating in a panel discussion following the presentation of the IMF Regional Outlook, Mahdi H. Mattar, Head of Research and Chief Economist of Shuaa Capital, said the UAE banks' provisions are likely to go up to 5 per cent of the asset size by year end from the current 2.5 per cent.

Nasser Al Saidi, chief economist of the Dubai International Financial Centre, said the banking sector is likely to show an increase in NPLs for the next few quarters and that is not a real reflection of the state of the economy. "We should remember that NPLs are a lagging indicator and are likely to remain high even if various econ-omic sectors have bottomed out."

According to the IMF report, the capital adequacy ratios of the Gulf banks are far above the regulatory norms, while the ratios of non-performing loans are below the global average with provisions well above 100 per cent.

The Gulf governments and central banks have been proactive in supporting the banking sector through liquidity support programmes and direct capital injections. While praising these measures, the IMF urged the regional governments to continue to support the financial system to make adequate liquidity available to the banks.

The IMF report urges Gulf governments to keep up public spending to tide over the impact of the global credit contraction. "Regional governments should continue with public spending next year because we're not out of the woods," Ahmad said.

Drawing on substantial reserves built up prior to the crisis, governments responded with strong countercyclical policies, which have helped contain the impact on the non-oil sectors of their economies: non-oil GDP has slowed, but still is projected to grow at 3.2 per cent in 2009.

With oil prices gaining and the IMF estimates the Gulf Cooperation Council's share of world imports expected to increase from 2.7 per cent in 2008 to 3.2 per cent in 2010, the region's contribution to global demand will remain high. "Measures to strengthen financial regulation and supervision already being instituted in some countries — will remain crucial for safeguarding the financial system against future shocks," Ahmad said.