A steady weakening of economic conditions for the GCC sovereigns, which stemmed from the steep decline of oil prices in the past year, is expected to show on the deposit and credit growth, cost-effectiveness, and asset value of local banks this year, according the one of the credit rating agencies, Standard & Poor’s.
Standard & Poor’s anticipates Brent to cost $55 per barrel in the year 2015, $65 in the year 2016, and about $75 in the year 2017. The rating agency has revised the ratings of regional rulers in the first quarter of the year following the alterations in opinion about the risk of the credit value of the current banking systems.
Even though analysts at Standard and Poor’s do not anticipate a steep slowdown in the financial and credit growth followed by worsening in asset value metrics, they stated that there would be an overall moderation in the banking division.
One of Standard and Poor’s analysts, Timucin Engin, stated that they do not really expect an announced slowdown in domestic credit growth compared to the slightly expected economic growth in the coming two years. This is because none of the GCC sovereigns publicized any significant reductions in spending for infrastructure. Nevertheless, they do expect a meek slowdown in developments relevant to the oil sector. They also expect banks to be rather selective regarding the loans they lend out for long-term projects, which might require longer funding.
For the GCC banking system, Standard & Poor’s has predicted an 8.5-9% overall growth in 2015 and 2016, compared to the 9.8% predicted in 2014 and the 10% predicted the year before. Due to this, GCC domestic credit is expected to grow to around $1.2 trillion (AED 4.4 trillion) by 2016 from the $1 trillion at the end of 2014, not including credit exposure to non-residents and limelight on wholesale banks of Bahrain.
If the oil price deterioration is to continue for a longer time, Standard & Poor’s expects a tougher effect on local credit growth via abridged government spending. Infrastructure and groundwork spending by rich governments of the Gulf is traditionally seen as an essential driver of domestic credit growth and commercial activity in the region.
According to Mr. Engin, considering the fact that the GCC sovereigns are greatly dependent on revenues coming in for hydrocarbon, they could potentially reduce the spending costs of infrastructure in order to expand budget deficits, that is, if oil prices remain lower for longer.
Standard and Poor’s also expects denser growth in the trade banking sector of the UAE this year, and local credit growth to be around 8% for both 2015 and 2016 parallel to the 9.5% of 2014.