Dubai: Potential impact of Turkish lira’s collapse will be limited on GCC economies, thanks to the dollar-pegged currencies and well-managed economies with strong current accounts and fiscal positions.
“The GCC pegs to the dollar will remain a source of stability for the region, especially in the context of weakening emerging market currencies. The GCC’s stable currency outlook is positive for capital and portfolio flows into the region. This stability will also be important in keeping imported inflation low, particularly with the introduction of VAT in Saudi Arabia and the UAE this year,” said Monica Malik, Chief Economist of Abu Dhabi Commercial Bank.
Despite the prolonged slump in oil prices between 2014 and 2017, fiscal reforms and the recent recovery in oil prices have seen sharp decline in fiscal deficits and current accounts moving to positive territory. According to Institute of International Finance projections, the fiscal deficits of GCC countries are expected to narrow as oil earnings climb. The external positions are also expected to strengthen, with widening current account surpluses in the UAE, Saudi Arabia, Kuwait, and Qatar.
External pressures on Bahrain are likely to persist as both fiscal and current accounts remain in deficits while official reserves are critically low. Analysts say a weakening in global risk sentiment given Bahrain’s need for external funding due to its weaker macro fundamentals make it somewhat vulnerable to spillover effects from Turkey, However, economists say the strong GCC support to Bahrain will be stabilising factor.
“We see developments related to the reform and fiscal stability support package under discussion with fellow GCC countries (Kuwait, Saudi and UAE) as being the key factor for Bahrain’s access to international capital,” said Malik.
While the GCC economies have remained relatively unaffected by the currency turmoil in Turkey barring the potential impact on non-oil trade and travel and tourism from the strengthening of the dollar-pegged currencies. However, regional stock markets have not been immune to the recent Turkey developments.
Most of the indices ended last week on a negative note with the exception of Abu Dhabi. For the week, Dubai was the worst performer among its peers with losses of -4.0 per cent, followed by Saudi Arabia and Kuwait down by -3.9 per cent -3.8 per cent and -1.4 per cent; while Oman and Bahrain recorded losses of -0.9 per cent and -0.2 per cent, respectively. Abu Dhabi was the only market that ended the week with gains of +0.7 per cent.
Analysts said regional banks with exposure to Turkey are most vulnerable. According to a research note from Shuaa, among the GCC banks, Qatar Natioanl Bank (QNB), Commercial Bank of Qatar (CBQ), Burgan Bank, Kuwait Financial House (KFH) will have meaningful impact on earnings on the back of the lira’s current depreciation. The UAE’s Emirates NBD is exposed to Turkey as the bank is in a deal to buy Denizbank, a Turkish bank from Russia’s Sberbank for 14.6 billion liras ($3.2 billion).
KFH and Burgan bank have sizeable lending exposure with 30 per cent and 25 per cent of total group loans respectively to Turkish subsidiaries, while the Qatari lenders such as QNB and CBQ have 13 per cent and 15 per cent of loans to Turkey. As for the earnings are concerned, Turkey contributes 19 per cent and 18 per cent of earnings for KFH and Burgan respectively and 14 per cent and 8 per cent of earnings for QNB and CBQ respectively. Additionally in Saudi, NCB has exposure to Turkey via a 67 per cent stake to Turkiye Finansbank, but the impact is relatively negligible.
“There will be a negative impact on core equity capital of the parent company driven by FX revaluation losses as a result of depreciation in the Lira. Although majority of the these exposed banks are more than adequately capitalised, we draw our attention to two banks namely CBQ and Burgan who have relatively thinner capital adequacy ratios,” said Aarthi Chandrasekaran, Vice-President of Shuaa Capital.