Covid-19 to test mettle of bank lending in GCC

Dubai - Middle East has shown resilience, demonstrating ability to weather previous outbreaks diligently

The knock-on effects of lower economic growth and oil prices in the wake of the Covid-19 outbreak will further slow lending growth and increase the overall stock of problem assets at GCC banks, S&P Global Ratings said in a new study.
The effect of the expanding epidemic on global growth has direct implications for the GCC countries, said the report titled Prolonged Covid-19 disruption could expose the GCC's weaker borrowers.
"Weaker global demand will strain GCC economies and the effect will be amplified by key trading partner concentrations," said S&P Global Ratings credit analyst Mohamed Damak.
The publication follows recent revisions to its oil price assumptions to $40 per barrel in 2020 from $60 previously. "We estimate that the volume of vulnerable goods exports ranges from 53 per cent of total exports for Oman to about 17 per cent for Bahrain," the ratings agency said.
The report said the GCC's hospitality industry, which includes sectors like airlines, hotels and retail, will see lower revenue because of decreased tourism and business flows, as travel aversion and restrictions bite during the peak tourism season.
"Furthermore, across most major bourses, prices have declined sharply and risk aversion has spiked. For the GCC region, this means issuers that have weaker credit quality or significant direct exposure to affected industries will find it difficult to access capital markets," said Damak.
The Central Bank of the UAE recently formally requested banks to implement measures to counteract the effects of the epidemic including rescheduling loans, offering temporary deferrals on monthly loan payments and reducing fees and commissions.
Management consultancy Oliver Wyman has also warned that the resulting impact of the coronavirus outbreak on the global economy could lead to reduced borrowing and lending that will affect banks with a bearing on corporate and personal finance in Dubai and the Middle East.
The Middle East has shown resilience demonstrating the ability to weather previous outbreaks diligently including the Middle East respiratory syndrome in 2012. However, today the region faces new challenges with the outbreak of Covid-19.
The growing anticipation of a cyclical economic downturn accelerated by the impact of Covid-19 has worsened credit quality and limited funding, placing greater pressure on the liquidity of financial institutions, particularly banks, said the Oliver Wyman report.
S&P Global said the GCC banking sector will also see declining interest margins along with slow lending growth and increase the overall stock of problem assets.
"Combined, these shifts will weaken banks' profitability. Capitalisation is unlikely to be affected by these changes and it should continue to support bank ratings. On the funding side, the lower oil price is likely to slow deposit base growth," said the report.
- issacjohn@khaleejtimes.com