Islamic finance: The slump in oil prices creates new opportunities
In March, Moody’s placed 31 out of 56 rated GCC banks on review for downgrade. In the countries most affected by the oil slide — Saudi Arabia, Bahrain and Oman — all rated banks are under review. Bahrain and Oman both had their long-term ratings downgraded.
In fact, the first quarter results available on Bankscope for banks based in the Gulf area show most of them delivered very modest performance in terms of net income, with the exception of banks in Qatar (both conventional and Islamic), Khaleeji Commercial Bank in Bahrain and Emirates NBD based in Dubai. One of the reasons that Qatar’s bank seem to be in better shape is the continued loan growth and deposits entering the economy from increased government spending on infrastructure and other projects linked to the 2022 soccer World Cup.
But the rest of banks are noticing strongly the impact of oil prices which fell dramatically during 2015 and pulled liquidity out of the banking system and steam out of the entire economy. The historically low oil price has bitten the public sector too. For the first time in more than a decade, the states of the Gulf Cooperation Council — Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE — face twin fiscal and current account deficits, according to rating agency Moody’s. Also, dozens of corporate directors, particularly those that rely on government spending, have been folding their businesses as payments slow after the collapse in oil prices.
Along these lines, fiscal deficits have soared to 12.5 per cent of GDP on average, forcing Gulf governments into painful measures such as subsidy reform and the introduction of sales tax from 2018, while the GCC states’ current account deficit has grown to 10 per cent of GDP, signalling a need to attract foreign investment.
However, even if oil prices remain at low levels for the longer term, the GCC banks will, for the most part, remain insulated from significant rises in bad debts and write-offs because the credit cycle of the GCC countries is still in early stages. Moreover, banks in the countries with large sovereign wealth fund asset such as UAE, Kuwait, Qatar and Saudi Arabia have ample buffer to maintain their spending and to support banks if necessary.
The new scenario has created opportunities for global banks, who can once again set up local lending activity and help open up regional access to international markets.
On the other hand, the Gulf’s wealthiest merchant families, concerned about the impact of oil prices on government spending, and therefore their core businesses, are looking favourably at the west for investments.