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COVID-19 Exposes Funding & Liquidity Gaps At Banks In ME, Turkey, and Africa

Higher funding costs, increasing capital outflows, and potentially broader liquidity tension will characterize the months to come

Customer deposits main source of funding for banks in META, between 70% and 75% of their liabilities The IMF availed $50 billion to assist low-income and emerging-market countries that face virus disruptions Sovereigns will absorb part of the hit of banks' liquidity pressure on their balance sheet

By: S&P Global Ratings

S&P Global Ratings believes fallout from the coronavirus pandemic is likely to expose funding and liquidity weaknesses at banks in the Middle East, Turkey, and Africa. Over the past decade, an increasing number of banks have tapped international pockets of wholesale funding and deposits of nationals living abroad. While customer deposits are a major source of funding, there are gaps, partly because local capital markets are nascent and saving rates are low.

 We believe the measures adopted to contain COVID-19 have pushed the global economy into recession.   

Until recently, the appetite for debt issued by the region’s banks was still high. Investors were actively chasing returns, at a time when a large amount of issuance out of developed market carried negative yields.

This propelled capital flows into some countries in the Middle East, Turkey, and Africa (META), sustaining their currencies. That made some of them, eventually, dependent on external funding.

Now that market sentiment has reversed and risk aversion is back, some banking systems in the region are in for a bumpy ride. Higher funding costs, increasing capital outflows, and lower lending growth will characterize the months to come. That will further aggravate bank’s funding and liquidity weaknesses, at a time when they are needed to smooth the economic and financial impact from measures to contain COVID-19.

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Local Funding Is Barely Sufficient 

Customer deposits constitute the main source of funding for banks in META, representing on average between 70% and 75% of their liabilities. This percentage is lower, 50%-60% in countries, such as Turkey, which have access to external wholesale funding sources. It is higher in countries, such as Jordan, Lebanon, and Morocco that rely on significant remittances from citizens living in other countries (see chart 1).

Except for a few cases, these deposits are barely sufficient to fund lending books. Loan-to-deposit ratios average an elevated 100% for banks in the region, with Turkey and Tunisia significantly exceeding this number and Lebanon and Egypt standing at much lower levels. We believe deposit growth will remain subdued or decline as measures to contain COVID-19 reduce tourism revenue, exports, remittances, and foreign investments, which will in turn reduce the countries’ and the banks’ foreign currency liquidity. Banks in some of these countries are therefore bracing for a bumpy ride.

The funding and liquidity risks are also exacerbated by the lack of large and deep domestic capital markets that pushed some META countries and banks to raise money on the international capital markets.

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Where Will The Funding Come From To Combat COVID-19? 

With the coronavirus starting to spread in Africa and a few other Middle Eastern countries, governments are coming up with monetary and fiscal responses and support packages to contain the outbreak and help their economies deal with the fallout. These range from governments extending direct guarantees to certain corporates and small and midsize enterprises, to asking banks to extend additional loans to clients to help them deal with cash flow shortfalls who have had to close their businesses for now.

The IMF has made available $50 billion to assist low-income and emerging-market countries that face disruptions related to the virus. This includes $10 billion at zero interest rates for the poorest members.

The other alternative consists in shifting the risks to banks, requesting them to support their economies through increased lending and credit, with increased liquidity from central bank refinancing. However, that may lead to local currency depreciation, which in turn can increase credit risks.  In Turkey, the sharp depreciation of the local currency has increased credit risks for the banking system. Currency volatility can also weaken capitalization, due to foreign currency mismatches.