Posted on March 28, 2017

A variety of indicators and evidence point to the coming year as a challenge for GCC capital markets, attributable largely to the usual suspects: the recent substantial decline in oil prices in addition to the political uncertainty in the Middle East.

  • Overall GCC credit growth is expected to continue the downward slide from 14% in 2012 to 6.4% last year and some 5.5% this year. This decline translated into a lower GCC banking sector combined net profits: down 2.4% in 2016 to $30.47 billion, compared to a 5.1 per cent growth over the previous years. The principal growth motivator remains sovereign revenue diversification efforts. The resilience of non-oil sectors should help keep non-performing loan ratios in the 3-4% range, though high sector and single borrower concentrations could prove problematic in any unexpected downturn. Finally, credit growth should get a boost from the rising GCC banking sector Loan-to-Deposit (LTD) ratio which is now hovering at a high of 91.5 per cent, up from 85.2 per cent in 2013, according to a recent report published by U Capital.
  • The WSJ noted that the Qatar stock market recently took a hit as Doha Bank went ex-dividend and shareholders approved a 20 percent capital increase through the issue of new shares. More regional banks will likely need a fresh injection of capital.
  • The economic slump caused by low oil prices and government austerity measures slowed the January yearly growth in Saudi Arabian bank lending to 1.8%, its lowest level in almost seven years. While this may reflect reticence of the private sector in making new investments, it also might encompass Saudi state debt repayments as a result of the October jumbo $17.5 billion debut international bond issue and stabilized oil prices. The net effect of these factors on Saudi credit markets has been a dramatic drop in the three-month interbank offered rate to 1.785%, the lowest level in the last year. Leveraging its initial foray into international capital markets, the Kingdom is expected to issue a conventional bond in the international market later this year, Reuters reported. 

Evolving regulations are also expected to add pressure to the bottom-lines in the capital markets. GCC financial institutions and banks must accelerate their efforts to prepare for International Financial Reporting Standards (IFRS) 9 or risk non-compliance when the new financial instruments standard is adopted on 1 January 2018, according to accountancy and finance body ICAEW. And new actuarial reserve-setting and reporting requirements for insurers will drive continued technical reserve strengthening in 2017.