GCC lenders urged to fine-tune liquidity management

20/07/2017 06:16 AST

Overall, loan growth is expected to register a solid growth of 4.9% in 2017. This is, however, far lower than the average annual growth of 9.2% recorded between 2012 and 2016.

Seltem Iyigun, Coface economist, said: “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.”

Oil prices declined by over 75% between mid-2014 and January 2016 and since then, have risen back by about 85%. The fall resulted in deteriorated financial and business conditions in many countries, leading some governments to adopt austerity measures - such as cancelling low priority projects, raising administrative fees and curbing some subsidies.

Massimo Falcioni, CEO for Middle East Countries at Coface, said: “The banking system in Gulf Countries is facing new challenges following the decline in oil prices.”

The Coface report highlights how heavy dependence on oil has dragged down government fiscal revenues in many countries across the region. This has, in turn, had a bearing on liquidity in the banking sector and the results of corporates. The region’s budgets for 2017 showed reductions in public spending which will lead to the postponement of some important projects. This will make cash flow management more difficult for companies and reduce the opportunities for banks to finance mega-projects, which are among their main sources of profitability.

“GCC banks need to fine-tune their liquidity management in order to face the economic cycle ahead. Current account surpluses have declined and countries’ fiscal surpluses have turned into deficits. The capacity of the public sector to accumulate liquidity in the banking system has subsequently lowered as well”, added Falcioni.

Low oil prices have led some of the GCC countries to use their own resources to finance budget deficits. Capital markets could play a larger role in fundraising in the present business environment. Tapping into international bond markets would help GCC governments to ease liquidity pressures and find additional sources that could be used for the private sector. In 2016, GCC governments raised $38.9 billion through international bond issues and despite the recovery in oil prices, they are expected to continue tapping into the bond markets in 2017.

The Gulf Today