Dubai: The huge drop in bank credit to the private sector will be a big concern for all economies across the Middle East and North Africa region, the International Monetary Fund said in its latest regional outlook.
"The credit growth in the region has come down from an average 30 per cent in 2007-08 to lower single digits. The relative sluggishness of private-sector credit growth is expected to adversely impact the growth prospects of the non-oil segment of the economy," said IMF Middle East and Central Asia Director Masoud Ahmad.
Despite the massive capital injections and liquidity support provided by central banks and governments to banks in the Gulf region, the IMF report said that the banks in the region are largely risk averse.
The average capital adequacy of Gulf banks have been way above the 8 per cent Basel II framework requirement and the local regulatory minimum of 8 per cent in Saudi Arabia; 12 per cent in Bahrain, Kuwait and the UAE.
Despite the strong fundamentals, the weighted average non-performing loans (NPLs) to total loans in the region have almost doubled, increasing from 2 per cent at end-2008 to 4 per cent at end-2009. While this ratio has remained low by international standards, the loan growth across the GCC has been in lower digits.
The average capital adequacy ratio for UAE banks stood at 20.3 per cent at end-March 2010, up from 13 per cent at end-2008, and one of the highest for the region, thanks to government capital injections of $16 billion (Dh58.7 billion).
According to the IMF, a combination of factors such as an overall decline in funding resulting from slow deposit growth and tight access to external borrowing has reduced the lending capacity of regional banks. "While uncertainties surrounding the economic recovery, a few high profile corporate defaults and problems in the Kuwaiti financial sector have contributed to an increase in risk aversion on the part of banks, a decline in credit demand form the private sector also contributed to slow credit expansion," said Ahmad.
Continuing trends
In the UAE, banks had to raise loan-loss provisions in 2009 and this trend will continue this year. The combined provisions of banks increased from $6.8 billion at end-2008 to $12.8 billion at end-March 2010. On average, the NPL ratio of banks rose from 2.5 per cent at end-2008 to 4.3 per cent at end-2009, and is expected to rise to about 9 per cent in 2010. This increase is partly due to the central bank's tightening of regulatory standards via a reduction of the loan classification period from 180 days to 90 days.
Economists expect credit conditions in the region to remain tight this year. "We do not expect bank loans to private sector to improve substantially during the next two quarters. But clearly the Dubai World debt deal is expected to improve the risk apatite of banks," said Khatija Haque, Vice President — Research of Shuaa Capital.
Going by the previous boom and bust cycles in the region, the IMF expects a three-year gestation period for a full credit recovery. "In countries where private-sector credit has decelerated most markedly, a recovery to normal growth rates will take time. Particularly where a credit boom preceded the current slowdown, Historical patterns indicate that a protracted period of slow credit growth is to be expected," said Ahmad.
