Dubai: Liquidity conditions in the GCC banking sector is gradually improving but pressures will continue to persist during 2017, despite some visible strengthening of oil prices following supply cut deals among oil producers, according to analysts.
Liquidity has stabilised but continues to apply pressure on GCC banks, and may still deteriorate in some markets. Due to falling oil revenue, government deposits in banks have either been shrinking or at least not growing as fast as in the recent past.
The main consequence of tighter liquidity can be seen in higher funding costs and lower loan growth. Customer deposits form the bulk of GCC bank funding. Interbank rates have gone up significantly in all GCC countries.
“We believe this (interbank rates) increase has stabilised, but the higher costs are the new normal, after a period of exceptionally high liquidity. The liquidity tightening will be partially reduced by lower demand for loans as GDP growth slows, rebalancing supply and demand,” said Redmond Ramsdale, Senior Director, Financial Institutions at Fitch Ratings.
Real GDP growth in GCC is expected to average at 2 per cent in 2017 versus an average 1.9 per cent in 2016. “Adapting to a sluggish economic growth, we expect credit growth to slow to 6 per cent in 2017 versus 9 per cent year-on-year system average as of June 2016, but remain positive in the 3 per cent to10 per cent range (3 per cent in Saudi Arabia to 10 per cent in Qatar),” said Olivier Panis, vice-president and senior credit officer — banking at Moody’s.
Macro backdrop
GCC’s liquidity tightening started from a very high base, with exceptionally high liquidity in the market in recent years due to high oil prices. Liquidity has moved from “ample” to “comfortable” during the last two years. Most GCC banks maintain high levels of liquid assets as buffers. Pressure, if any, is likely to be on the smaller banks and those depend heavily on government deposits.
The deterioration in public finances over the past two and half years has meant that sovereign and GRE [government related entities] borrowing requirements have risen sharply, leading to increased dependence on international capital markets. Even with the assumption of oil prices stabilising in $50 to $60 range the aggregate fiscal deficit in the GCC will be around $60 billion in 2017.
“This could be a challenge in the context of tightening global liquidity: although the more affluent GCC governments have the fiscal buffers to accommodate this, it would nonetheless result in a continued erosion of creditworthiness, rise in borrowing costs, and a subsequent adjustment in risk premia. The less affluent, such as Oman and Bahrain, which lack the fiscal and external buffers of the likes of Qatar and Kuwait, could find the sustainability of their public finances and balance of payments significantly challenged,” said Citigroup in a recent note.
External funding
As a result of tighter liquidity, banks have issued more debt in 2016 and analysts expect this trend to continue in 2017. Another option used by many banks, and not only those with lower ratings, has been to tap the international syndicated loan market to refinance maturing debt.
Many investors (notably in Asia, but also in the US and Europe, where interest rates are low) have been willing to increase their exposure to GCC sovereigns and banks, due to the high credit ratings and good yields, and this is set to continue as they both issue. Fitch sees no material risks on foreign-currency liquidity at GCC banks in 2017, with foreign assets held by the banks, together with central banks, matching or exceeding foreign-currency debt and deposits in all GCC countries.
Basel III implications for liquidity are fairly significant in GCC countries as banks have a substantial contractual maturity mismatch between medium-term lending and very short-term customer deposits. Some banks have started to issue longer-tenor debt to reduce this mismatch, but this remains limited. Nevertheless, first indications show that the net stable funding ratio will be comfortably met as deposits in the region have been exceptionally stable. All banks meet the liquidity coverage ratio easily due to their very large stocks of government bonds and short-term interbank placements.
