Dubai: Banking and Financial services industry across the oil exporting countries in the Middle East region are not facing any major systemic vulnerabilities due to the fall oil prices, according to the latest regional economic outlook from the International Monetary Fund (IMF).
But a sustained fall in oil prices resulting in a contraction in public spending could result in vulnerabilities impacting asset growth, profitability and asset quality across the sector in the region.
In the GCC, slowing government spending presents a major risk for banking systems but it has so far been contained.
“Although some of GCC countries have large savings from accumulated oil export surpluses of the past, which could be put to use to iron out revenue shortfalls in the short term, for medium- to long-term fiscal sustainability they will be required to make adjustments on both revenue and spending plans,”said Masoud Ahmad, the IMF’s regional director for the Middle East and Central Asia.
The IMF expects oil prices to average $52 a barrel in 2015, down from $110 a barrel in the first half of 2014, gradually increasing to $63 a barrel by the end of the decade.
Government infrastructure spending drives non-oil GDP growth and bank lending to public sector entities and private contractors whose performance, in turn, affect the credit risks of banks.
Bank lending to households is driven by growth in the public sector wage bill.
“Because most GCC countries have large buffers, slowdowns in government spending in response to lower oil prices, are expected to be gradual, limiting credit risks,” Ahmad said. “Moreover, prudential frameworks have been strengthened to comply with Basel III rules.”
A lingering concern, though, is that credit risk can be amplified by high loan concentrations to single borrowers and/or sectors, particularly those that are cyclically sensitive such as real estate and construction.
Exchange rate pegs are perceived as credible, thus exchange rate risks are muted.
The IMF has observed that risks to financial stability are higher for non-GCC Middle East and North Africa (Mena) oil exporters. Significant bank vulnerabilities remain, while capacity to mitigate the risks is limited because of generally smaller or inaccessible buffers and weaker or absent macro-prudential policies and crisis management frameworks.
Banking systems in the Mena region have been more resilient, in aggregate, but there is considerable heterogeneity across countries in terms of bank performance and vulnerabilities.
Deposit growth in oil-exporting countries across the region, including GCC countries, has begun to moderate, yet bank liquidity remains high.
Credit growth is slowing, however, except in Qatar where investment in the run-up to the 2022 Fifa World Cup is driving credit demand.
So far GCC banking sectors have continued to perform strongly, reflecting solid economic fundamentals and low bank vulnerabilities.
Although the oil price shock has eroded fiscal and external surpluses, the impact on economic activity has been limited because large financial buffers have allowed governments to avoid sharp cuts in public spending, supporting consumer and investor confidence.
Lending to households is predominantly to public sector employees, whose incomes have not been affected by the decline in oil prices.
Banks have benefited from abundant retail deposits while available financing has contained governments’ drawdowns of bank deposits.
Fact box: Vulnerabilities high for non-GCC Mena
In non-GCC Mena oil exporters, the banking sector’s performance has been mixed, reflecting structural vulnerabilities that predate the oil price shock.
Algeria’s exchange rate has depreciated and the economy has slowed, but controls on banks’ foreign exchange exposures and administrative restrictions on lending to households have muted the exchange rate and credit risks for banks.
Strains in Iran’s banking system have emanated from the effects of sanctions and bank governance issues, while the impact of low oil prices has been less apparent.
In Iraq, the economic slowdown and the fiscal crisis, stemming from low oil prices and the insurgency, increased financial stability risks as banks’ financing of fiscal operations rose.
