Complex Made Simple

The Coronavirus impact on GCC banks now minimal, but that could change

Will the Coronavirus eventually lead to reduced borrowing and lending in the GCC?

Growing anticipation of a cyclical economic downturn accelerated by the impact of COVID-19 has worsened credit quality Central banks in the Gulf on March 4 2020 cut key interest rates Should the outbreak put pressure on important sectors, such as real estate, the effects could surface in the next few months

Prominent management consultancy Oliver Wyman warns that the resulting impact of the Coronavirus (COVID-19) outbreak on the global economy could lead to reduced borrowing and lending that will affect banks with a bearing on corporate and personal finance in Dubai and the Middle East.

The Middle East has shown resilience demonstrating the ability to weather previous outbreaks diligently including the Middle East Respiratory Syndrome (MERS) in 2012 however, today the region faces new challenges with the outbreak of COVID-19. Growing anticipation of a cyclical economic downturn accelerated by the impact of COVID-19 has worsened credit quality and limited funding, placing greater pressure on the liquidity of financial institutions, particularly banks.

Read: Lebanon to not pay $1.2 billion Eurobond debt

The Central Bank of the UAE (CBUAE) earlier this week formally requested banks to implement measures to counteract the effects of COVID-19 including rescheduling loans,offering temporary deferrals on monthly loan payments and reducing fees and commissions.

The banking sector requires capital to lend in order to function and operate a sustainable business. For companies and individuals, credit quality reflects their ability to repay debt. Poorer credit quality increases the reliance on the banking sector to provide loans and fund development, placing greater pressure on liquidity levels.

Impaired liquidity in the banking sector limits funding, which could raise a barrier toward business growth and personal finance relief that could lead to a detrimental cycle in the region.

Read: Stocks in freefall as Oil price crash increases global recession risks

COVID-19, officially declared as a global emergency by The World Health Organization (WHO), continues to evolve with far-reaching effects on people worldwide. More than 5,000 cases have been recorded across the Middle East, most of which in Iran that follows China, South Korea and Italy in the number of new confirmed cases at more than 1,200 and almost 130 deaths*. Several cases have also been confirmed in the UAE. The outbreak has depressed global financial markets and had severe implications on trade, supply chains, and economies globally, subsequently deteriorating cash flows in sectors such as tourism, travel and hospitality, most impacted by the outbreak.

Read: The world and Covid-19: Ghost planes, races with no spectators, and offices with empty desks 

Oliver Wyman believes the global economic impact of the COVID-19 outbreak depends on its duration, how far it spreads and the extent quarantine disrupts the labour market.

For more Oliver Wyman perspectives on Coronavirus please visit:www.oliverwyman.com/coronavirus

Interest Rate cuts

Unrelated to this Wynan news, it was reported that Central banks in the Gulf on March 4 2020 cut key interest rates following the 50 basis points (0.5%) rate cut by the US Federal Reserve as an emergency monetary policy response to the coronavirus impact on growth.

The Central Bank of UAE (CBUAE), Saudi Arabian Monetary Authority (SAMA) and the Central Bank of Bahrain (CBB) have already announced rate cuts.

Analysts say the coronavirus outbreak and its impact on oil exporting GCC countries had warranted policy support to limit the economic and financial fallout. 

“Our [econometric] models now point to Mena regional real GDP growth of 2.1% in 2020 from 2.8% previously and for the GCC, our models signal real GDP to register 1.7% this year from 2.5% previously,” said Ehsan Khoman, Head of Research and Strategy at MUFG Bank in a recent note. 

Pressure on GCC banks

Banks and financial institutions across the GCC are expected to experience relatively muted impact of the coronavirus in China, according to rating agency Standard & Poor’s (S&P).

“We expect the impact of the new coronavirus on banks to be low, and come indirectly through the overall impact on GCC economies, which we expect to be minimal,” said Mohammad Damak, Director of Research at S&P

The banks in GCC have little direct exposure to Chinese companies. However, should the outbreak put pressure on important sectors, such as real estate, the effects could surface in the next few months. This is particularly relevant for banks in the UAE.