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How can GCC banks survive impact of low oil prices?

Sitting on the vast reserves of oil wealth, Middle East and North Africa (MENA) nations, especially in the Gulf region, have been hit hard by continued lower crude prices over the past few years. Ever since the crude prices took a plunge from as high as $125 a barrel in 2014 to their lowest of over $30 in 2016, Middle East’s oil-rich nations have seen their revenue dwindle drastically and fiscal deficit rise considerably, leading to a liquidity crunch in the region.

As per the latest estimates of the International Monetary Fund (IMF), the cumulative budget deficit of the Middle East oil producers will be nearly $320 billion between 2018 and 2022, with the energy-rich Gulf Arab nations bearing half of it. The IMF’s calculation is based on assumed oil prices of about $50 a barrel over a period of time.

Banks feel pressure

Since government entities such as sovereign wealth funds, state pensions and social funds have 80 percent stakes in the region’s top 50 banks, the banking sector has felt the impact of shrinking government revenues. Post 2014, GCC governments withdrew large bank deposits to keep up spending as oil export revenues dropped sharply.

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In Saudi Arabia, deposits of state entities fell 10.3 percent in 2016, whereas in the UAE, government deposits declined 3.8 percent in 2015, before recovering 1.9 percent the following year.

“Restricted resources would make banks more selective on granting loans in 2017 and 2018. This would also limit access to funding for corporates, especially for small and medium-sized companies, as they represent higher risks,” says Seltem Iyigun, economist, Coface, a multinational trade credit insurer.

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Affecting financial system

The governments’ decision to plug budget deficit through withdrawal of deposits have adversely affected the banks’ financial system. Bahrain’s central bank’s foreign reserves, including gold, have tumbled about 75 percent since 2014 to just above $1.39 billion. Deposits at National Commercial Bank, Saudi Arabia’s largest lender, has slipped 2.8 percent year on year to $81 billion at the end of September.

As a result, there is a drop in lending activities of the banks. Saudi Arabia’s seven largest banks reported a drop of around 4.9 percent in loans in third quarter of this year as the credit growth has stalled due to a weaker economy.

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However, UAE banking sector is putting a strong foot forward. According to BMI Research, the UAE’s banking sector is stable enough, with non-performing loans estimated to be at a manageable level of around 6 percent. Spending on infrastructure projects ahead of Dubai’s hosting of Expo 2020 has given a boost to both the economy and banks, despite expectations of a low loan growth.