A prolonged period of oil price volatility and low oil prices will be credit negative for the solvency and liquidity of banks operating in the Gulf Cooperation Council (GCC) states, according to credit rating agency Moody
On 9 March, oil prices dropped more than 25 per cent from their previous close to trade just above U$31 per barrel. The level was 20 per cent below the US$45-US$52 range in which oil traded the previous week and more than 40 per cent below the 2019 average price of US$64 per barrel. The decline came after Saudi Arabia announced that it would increase production after the Organisation of the Petroleum Exporting Countries (OPEC) and Russia failed to reach an agreement to address falling demand caused by the coronavirus outbreak.
Oil prices, public spending and the credit quality of GCC banks are significantly interlinked and all six GCC countries depend heavily on oil and gas revenues. Public spending derived from oil revenue drives a high proportion of economic activity in the region, with hydrocarbons contributing between 13 per cent of GDP (Bahrain) and 41 per cent (Kuwait).
The immediate effect of a sustained period of lower oil prices would be on the liability side, particularly reduced deposit inflows from government and government-related entities. The agency estimates that government deposits range between 15 per cent and 34 per cent of the deposits of the GCC banking systems. Materially lower oil-related revenues across governments and related entities would likely reduce the growth of these deposits, weakening the liability side of banks’ balance sheets and decreasing banking system liquidity.
A prolonged period of low oil prices risks constraining existing public spending plans which will undermine confidence and pressure economic growth. Economic growth and consequently credit growth in the GCC has already slowed since oil prices began to moderate in 2014. A more protracted period of lower prices will strain asset quality.
While GCC banks mostly have robust capital and liquidity buffers, all the region’s banking systems credit quality exhibit vulnerabilities that are broadly in line with the relative creditworthiness of their sovereigns. Banks in Bahrain and Oman are the most vulnerable in this respect.
Bahraini banks will face growth, profitability and potential asset-quality challenges, as well as declining liquidity levels. Omani banks, meanwhile, will experience further strain on their asset quality and profitability, exacerbating difficulties stemming from extended payment cycles. Although government deposits will remain stable, we expect Oman’s government to increase its borrowing from the banking system.
For their part, banks in Saudi Arabia and the UAE are facing some existing pressures, but are likely to be moderately affected specifically as a result of the decline in oil prices because of the countries’ relatively large reserve buffers. Both governments can in principle sustain public spending to support economic growth, but low oil prices are likely to constrain governments existing spending plans especially in Saudi Arabia, weakening operating conditions. As such, we expect credit growth to remain subdued, while profitability will decline and asset-quality is expected to weaken for the banks in these systems.
Banks in Kuwait and Qatar are likely to be relatively resilient to some extent in a lower oil prices environment because of their sovereigns’ large reserve buffers. These buffers will allow them to moderate the effect of a lower oil prices to some extent, supporting their economies and banking system fundamentals.
